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: Chapter 11
In re :
: Case No. 08-13555 (JMP)
LEHMAN BROTHERS HOLDINGS INC., et al., :
: (Jointly Administered)
Debtors. :
:
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:
In re :
: Case No. 08-01420 (JMP) SIPA
LEHMAN BROTHERS INC., :
:
Debtor. :
:
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JONES DAY
Attorneys for Lehman Brothers Holdings Inc., et al.
222 East 41st Street
New York, New York 10017
2
BOIES, SCHILLER & FLEXNER LLP
Attorneys for Barclays Capital Inc.
333 Main Street
Armonk, New York 10504
JAMES M. PECK
UNITED STATES BANKRUPTCY JUDGE
I. Introduction
A. Overview of Opinion
These matters arise out of the hurried, at times harried and now challenged sale of assets
to Barclays Capital Inc. ("Barclays") under Section 363 of chapter 11 of title 11 of the United
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States Code (the "Bankruptcy Code"). Before the Court are motions for relief under Federal
Rule of Civil Procedure 60(b) (the "60(b) Motions") from the order approving the sale to
Barclays entered on September 20, 2008 (the "Sale Order"), a related motion by Barclays to
secure delivery of certain undelivered assets (the "Disputed Assets") and three separate adversary
proceedings brought against Barclays by each of the moving parties (the "Movants1") that filed
the 60(b) Motions. The proceedings have illuminated the factual background of the largest,
most expedited and probably the most dramatic asset sale that has ever occurred in bankruptcy
history – the sale to Barclays by Lehman Brothers Holdings Inc. ("LBHI"), Lehman Brothers
Inc. ("LBI") and certain of their affiliates (together, "Lehman") of assets collectively comprising
the bulk of Lehman's North American investment banking and capital markets business (the
"Broker-Dealer Business").
The lengthy trial provided an opportunity to review in slow motion and from multiple
vantage points the circumstances of an acquisition that had to proceed so very quickly due to the
need for speed to salvage the Broker-Dealer Business after LBHI's unplanned bankruptcy filing
on September 15, 2008. The evidentiary hearings relating to the 60(b) Motions took place over a
thirty-four day period from April through October 2010. Following the close of the record, the
parties submitted post-trial briefs and proposed findings of fact and conclusions of law in late
November. These submissions are encyclopedic in their scope and attention to detail, and they
offer insights as to the motivations and behavior of many of the key actors during the most
momentous week of the greatest financial crisis of our lives. The trial itself was a showcase of
1
The Movants are Lehman Brothers Holdings Inc., the Official Committee of Unsecured Creditors (the
“Committee”) and the Trustee of Lehman Brothers Inc. under the Securities Investor Protection Act (the “SIPA
Trustee”).
4
Approximately thirteen billion dollars is at issue, but the amount in dispute is only one of
the reasons that this litigation has attracted so much attention. Foundational principles of
bankruptcy jurisprudence are also being tested. The 60(b) Motions constitute a most unusual
after the fact challenge to the fairness of a transaction of global significance, a transformative
business combination in the financial services industry that was accomplished at a time of fear
and major dislocation in the markets. The resulting litigation is highly visible due to interest in
the Lehman bankruptcy, the large sums involved and the extraordinary nature of the relief being
sought. Because the 60(b) Motions seek to overcome the finality and binding effect of the Sale
Order that was entered at the height of the financial crisis and that has also been affirmed on
appeal, these motions are unprecedented in challenging the very same order that the Movants
themselves (other than the Committee) defended throughout the appellate process.
The circumstances of these proceedings may be exceptional, but the core legal principles
are familiar ones that are generally applicable in other chapter 11 cases. The issues governing
the right to relief under Federal Rule of Civil Procedure 60(b) ("Rule 60(b)") are the same ones
that might arise in any challenge to a final order authorizing a sale of assets under Section 363 of
the Bankruptcy Code. These issues are grounded in the tension between the right of aggrieved
parties to obtain relief from final orders for cause shown and the right of purchasers of assets
from a chapter 11 debtor to rely with confidence on the integrity and enforceability of final sale
orders that have been entered by the bankruptcy courts, especially those that have been affirmed
This tension relating to finality naturally exists to some extent in every motion under
Rule 60(b), but the Court views final sale orders as falling within a select category of court order
that may be worthy of greater protection from being upset by later motion practice. Sale orders
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ordinarily should not be disturbed or subjected to challenges under Rule 60(b) unless there are
truly special circumstances that warrant judicial intervention and the granting of relief from the
binding effect of such orders. The Court is well aware, however, that the language of Rule 60(b)
setting forth grounds for relief from a final order has general application to all orders including
sale orders and that no order is exempt from this type of relief for cause shown.
This broadly framed right to relief under Rule 60(b) in the case of sale orders must be
balanced against the well-recognized bankruptcy policy that encourages third parties to buy
assets from debtors for the ultimate benefit of creditors and that protects third parties that have
purchased assets from a debtor in good faith reliance on an order of the bankruptcy court. A
basic question addressed in this Opinion is whether the Movants have shown sufficient special
circumstances to authorize the granting of relief from the Sale Order that was entered here in the
face of a profound emergency, that thereafter was affirmed by the United States District Court
for the Southern District of New York (the "District Court") and that Movants did not challenge
until one year later after the financial crisis of 2008 had subsided and markets had stabilized.
Because the Sale Order was the essential means to the end of completing this crucial acquisition,
the Court believes that something greater than ordinary mistake or inadvertence must be proven
As explained in this opening narrative and in the following sections of this Opinion,
Movants have proven that some very significant information was left out of the record of the
hearing on Lehman's motion to approve the sale of the Broker-Dealer Business to Barclays held
on September 19, 2008 (the "Sale Hearing") — facts that in a more perfect hearing the Court
would have known. Despite what in retrospect appears to be a glaring problem of flawed
disclosure, Movants have not carried their burden in establishing a right to relief from the Sale
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Order under Rule 60(b) because this new information would not have changed the outcome of
the Sale Hearing or altered the form and content of the Sale Order in any material respect.
Importantly, the failure to disclose material information in this case does not involve fraud,
abuses, relief under Rule 60(b) in all likelihood would have been granted.
A number of the issues in dispute also depend upon the enforceability and interpretation
of a document dated September 20, 2008 and finalized on September 22, 2008. The parties
identify the document as the clarification letter (the "Clarification Letter"). The Clarification
Letter is identified in the text of the Sale Order and was in the early stages of being drafted when
that order was entered. The document went through a number of revisions during the weekend
immediately following the Sale Hearing, but the final form of the Clarification Letter was never
presented for bankruptcy court approval. Instead, the parties decided among themselves that
approval was not required and then caused the executed Clarification Letter to be filed on the
docket on September 22, 2008. Thereafter, the parties to this letter agreement relied upon the
document as if it had been approved under the original Sale Order and for all purposes treated
the Clarification Letter as a binding agreement. The Clarification Letter stands out as a critically
important transaction document that purports to change and "clarify" some fundamental terms of
that certain Asset Purchase Agreement dated as of September 16, 2008 among LBHI, LBI, LB
745 LLC and Barclays (together with the First Amendment To Asset Purchase Agreement, dated
September 19, 2008,2 the "APA") even though it was not formally blessed by separate order.
The failure to obtain such an order adds a layer of extra doubt to consideration of the
demands by Barclays to recover the Disputed Assets and leads to some nagging questions about
the enforceability and binding effect of what amounts to a vital side letter or amendment to the
2
The First Amendment Clarifying Asset Purchase Agreement is referred to herein as the First Amendment.
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APA – one never presented to the Court for approval – that makes major changes to the structure
of the acquisition and that affects property rights of entities that quite obviously are subject to the
Court's jurisdiction under the Bankruptcy Code and provisions of the Securities Investor
The Clarification Letter includes any number of clarifications that are really more than
that – they are important additions or alterations designed to match the documentation for the
transaction with the evolving business understandings of the parties. Some of these provisions
are either radically different from anything presented at the Sale Hearing or in actual conflict
with statements made during that hearing. This is a document that should have been subjected to
further judicial oversight, either to confirm that it was in fact covered by the language of the
existing Sale Order or to obtain express bankruptcy court approval for these agreed changes to
the APA. The Court has little doubt that such a further hearing would have been requested if
there had not been such inordinate timing pressure to immediately close the acquisition.
Despite the lack of explicit bankruptcy court approval and in recognition of the conduct
of the parties in relying on the Clarification Letter as a controlling document, the Court has
decided to treat the document as having been approved by virtue of the combination of
references made to the Clarification Letter in the Sale Order and the conduct of the parties
enforceable and will be interpreted in a manner that is consistent with the record of the Sale
Hearing. That record makes clear that Lehman cash is excluded from the purchase and does not
expressly mention certain additional categories of assets that were specified for the first time in
drafting the Clarification Letter. These newly described assets were identified or discovered on
the morning of the Sale Hearing in the course of a final search by Barclays for additional assets
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(the so-called "asset scramble"). The asset scramble yielded the three disputed asset classes that
are now the subject of the motion by Barclays to compel delivery of the Disputed Assets. These
assets, described more fully below, are the 15c3-3 assets (the "15c3-3 Assets"), margin related to
exchange traded derivatives (the "Margin Assets") and assets in clearance boxes (the "Clearance
Box Assets").
The Court denies relief under Rule 60(b) to the Movants, grants the motion of Barclays to
recover the Clearance Box Assets, and denies that motion as it relates to the Margin Assets and
the 15c3-3 Assets. The decision to deny 60(b) relief is based on the failure of the Movants to
show that the outcome of the Sale Hearing would have been different if all material facts
(including those relating to the structure of the transaction and the value of the acquired assets)
had been disclosed. The determination of the motion by Barclays to recover the Disputed Assets
depends upon a nuanced interpretation of the Clarification Letter in light of the record of the Sale
Hearing, the language of the document and extrinsic evidence concerning the negotiation and
drafting of that language. The immediately following sections of this Introduction provide
B. The 60(b) Motions Have Emphasized Information That the Court Did Not Know and
Should Have Known, But This Information Would Not Have Changed the Outcome of the
Sale Hearing
The 60(b) Motions rest on the proposition that the Court was not fully informed when it
entered the Sale Order approving the sale of the Broker-Dealer Business and that Barclays, with
the active and complicit assistance of certain senior executives of Lehman with allegedly
conflicting loyalties, ended up with too favorable a deal during a period of market turmoil,
uncertainty and confusion. Stated simply, the 60(b) Motions allege that Barclays should forfeit
the protections of the Sale Order, even though that order is final and has been affirmed on
9
appeal, because it achieved a substantial windfall gain as a result of buying financial assets at a
deep discount from fair value to the detriment of all creditors of the Lehman estates. These
motions are premised on the troubling notion that material information relating both to the value
of the assets being sold and the means for implementing the transaction was not disclosed to the
Court. Barclays disagrees strongly with this assertion and submits that the Court acted properly
and was given all necessary evidence under the exigent circumstances to approve the sale, that
the 60(b) Motions should be denied in all respects and that Barclays should be awarded the
Disputed Assets.
Barclays points out, among other things, that the Movants knew about the so-called
discount yet chose to align themselves with Barclays and steadfastly supported the Sale Order
throughout the appellate process that led to the decision of the District Court affirming the Sale
Order. Barclays has portrayed the Movants as parties who were content to accept the obvious
benefits of the Sale Order while the markets were unsettled during the early stages of the
bankruptcy case and who now are pursuing claims for incremental consideration from Barclays
after the markets have recovered and it has become safe for them to seek extraordinary relief.
Barclays has denied that there are legally sufficient grounds to support such relief and has
explained that the acquisition was structured from the outset to include a favorable spread
between long and short positions (described by its senior officers as a "buffer"), that this feature
of the transaction was publicly disclosed immediately after signing of the APA (although not
disclosed in so many words to the Court), that its acquisition balance sheet (the "Acquisition
Balance Sheet") fairly reflects sound valuation and accounting judgments made after
consultation with its independent auditors and that its multi-billion dollar gain on acquisition
reflected the negative goodwill of a business combination that, from the perspective of Barclays,
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always was intended to be capital accretive and to include an assortment of intangible assets that
were of no value to the estate after filing for bankruptcy and were not separately valued at the
The urgent sale to Barclays took place during the terribly stressful days immediately
following LBHI's bankruptcy filing and was one of the landmark events of the extraordinary
week from September 15 through September 22, 2008 (labeled by the Court as "Lehman Week"
for purposes of this Opinion). At the time, the transaction was regarded by many as an
admirable, even heroic, achievement that helped to salvage jobs, preserve going concern values
and provide for the orderly transition of many thousands of brokerage accounts to a financially
secure firm with the resources to manage and service the financial assets held in those accounts.
The widely-held belief was that without the virtually immediate rescue by Barclays the direct
and indirect damage to Lehman, its customers, creditors, and the entire financial system resulting
from the bankruptcy would have been even more devastating. The perception during Lehman
Week was that the transaction with Barclays benefitted all interested parties, mitigated systemic
risk and helped to save every one of us from an even greater economic calamity. Nothing in the
voluminous record presented to the Court in these protracted proceedings has done anything to
The sale was the only available transaction at a time of unrivaled worldwide financial
distress bordering on panic. The APA needed to be approved, not conditionally with exposure to
the potential risks of hindsight challenges, but absolutely and finally. In exercising its discretion
to approve the transaction described in the APA, the Court recognized that it was dealing with an
uncommon emergency but is satisfied that it still managed to comply with all applicable
requirements of the Bankruptcy Code and of procedural due process. The District Court
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affirmed the correctness of that conclusion in an appeal in which the Movants collectively
supported (or, in the case of the Committee, did not oppose) this Court's approval of the sale.
The 60(b) Motions do, however, prompt the Court to engage now in a careful inquiry as
to whether what was not disclosed regarding the transaction so impaired the Court's ability to
properly evaluate the overall fairness of the terms of the acquisition that Barclays should lose the
protections of the Sale Order and become exposed to multi-billion dollar claims for additional
consideration. Having dwelled at some length on this question, the Court concludes that nothing
in the current record, if presented at the Sale Hearing, would have changed the outcome of that
hearing. The Court still would have entered the very same Sale Order because there was no
better alternative and, perhaps most importantly, because the sale to Barclays was the means both
to avoid a potentially disastrous piecemeal liquidation and to save thousands of jobs in the
C. The Broker-Dealer Business Had to Be Sold in a Great Hurry to Save Jobs, Preserve
Going Concern Value and Minimize Claims Against the Estate
The APA represented the best possible alternative for Lehman's employees at a time
when the proverbial "ice cube" was melting. The Court knew that the Broker-Dealer Business
was being sold to the one buyer in a position to employ thousands, to protect customers and to
maintain the on-going operations of what had been Lehman's core business. While it is true that
a number of highly relevant and clearly important disclosures were not made at the Sale Hearing,
those failures to disclose are far outweighed by the fact that the Court was well enough informed
to approve the acquisition with complete confidence that it was better than any alternative.
workforce. That was true for Lehman, and the value of its Broker-Dealer Business depended
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upon the relationships, sophisticated knowledge and experience of that workforce. In the
aftermath of the bankruptcy filing, employees were leaving the firm in great numbers, and
without a going concern sale that provided assurances of continued employment, there would be
nothing left for Lehman to sell other than a substantial book of assets discounted by the
distressed circumstances of a liquidation sale in a most uncertain market. That reality and the
desire to save the enterprise drove the professionals responsible for documenting the acquisition
to work under extraordinary time pressure to accomplish within a few days what ordinarily
Knowing that approval of the transaction would save a multitude of financial sector jobs
probably was the most significant single factor influencing the Court's thinking when it
considered the sale. The transaction included offers of employment to most members of the
Lehman work force that not only helped these individuals at a most difficult time on Wall Street,
but also unquestionably was good for the estate, brokerage customers and the general economy.
A going concern sale to Barclays also was the one way to eliminate claims of employees for lost
wages and benefits as well as claims of counterparties for potential damages arising under a
variety of executory contracts with Lehman. Assumption of these obligations by Barclays meant
that the Lehman bankruptcy estate would avoid exposure to liability for many claims that could
only be estimated.
The trial has focused attention on whether the estimates in the APA for these
compensation and cure expenses ("comp and cure") were inflated as part of a conscious effort to
make it appear that Barclays was paying more for the acquired assets, but the Court has not given
much weight to this evidence in its current deliberations. It is true that the estimates were
incorrect and turned out to be excessive in relation to the actual amounts paid by Barclays for
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comp and cure, but the Court did not rely on the pinpoint accuracy of these estimates when it
approved the sale to Barclays (although it did believe that the numbers provided were reasonable
and represented the best good faith estimates of potential exposure at the time). The number
provided for cure costs turned out to be materially overstated and unreliable, but the Court does
not conclude that the discrepancy is the result of a deliberate effort to make it appear that
Barclays would be paying more for these liabilities. What mattered most to the Court about
comp and cure was the knowledge that Barclays was picking up all of these expenses, whatever
they might turn out to be, thereby satisfying the entire universe of comp and cure claims that
D. Context Matters, and the Urgency of Lehman Week Is an Inescapable Factor Impacting
Both the Expedited Approval of the Sale to Barclays and the Decision Not to Revisit that
Sale Now
The sale to Barclays was and remains to this day truly extraordinary in that Barclays,
without prior planning, agreed to purchase the Broker-Dealer Business almost immediately after
the bankruptcy filing, and the sale process itself was expedited to the point of raising some very
real due process concerns. The Sale Order was entered only five days after commencement of the
LBHI case and within hours after the filing of the LBI case. That is a speed that takes ordinary
transactional coping skills to the breaking point and beyond. This was also all occurring at a
time of market disruptions unlike anything ever experienced since the dawn of the age of
electronic trading and globally connected markets, and sophisticated market participants were
Lehman Week certainly was no ordinary week. Each day brought with it a new systemic
shock. Merrill Lynch had just been sold to Bank of America in a hastily-arranged transaction.
Lehman filed for bankruptcy relief in the early morning hours on September 15th (the "Filing
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Date") after running out of options, and AIG was bailed out by the Federal Reserve the very next
day. Seasoned observers too young to recall the Great Depression had never seen anything to
match these disastrous events. By the end of the week, Goldman Sachs and Morgan Stanley had
sought refuge under the Bank Holding Company Act to achieve greater operational stability and
security. By virtue of astonishingly fast-moving market forces, venerable Wall Street institutions
were toppling, being rescued or restructured on a daily basis. Financial counterparties had
reason to distrust the soundness of blue chip firms with once seemingly unimpeachable
credentials.
This loss of confidence was fueled by widespread skepticism concerning the underlying
financial strength and reliability of balance sheets that included illiquid and hard-to-value
securities backed by subprime assets. These securities and other structured financial products
had been widely disseminated to financial institutions throughout the world. Just about every
major bank had to make tough judgment calls as to the valuation of these highly-complex and
now-suspect structures and faced questions as to the fair value of these assets. This difficult
week ushered in an uncertain and volatile period when trust was in very short supply and
At this very time of market turmoil and reduced tolerance for risk, Barclays chose to act
boldly and seized the opportunity to greatly expand its business platform in North America.
Barclays was particularly well situated to move forward opportunistically because in the days
immediately preceding the Lehman bankruptcy, it had been engaged in intense negotiations to
purchase Lehman's global business operations in their entirety. Those prepetition negotiations,
while unsuccessful, served as a prelude to and essential preparation for a high-speed emergency
15
bankruptcy acquisition and placed Barclays in a uniquely advantageous position relative to any
other institution that might be interested in competing for the Lehman franchise.
After the bankruptcy, Barclays, at the suggestion of Lehman's President Bart McDade,
promptly renewed discussions regarding a possible acquisition and, by September 16, had come
banking business as detailed in the terms and conditions of the APA. The impact of the
transaction was enormous for both parties. For Lehman, it meant a going concern sale that
would save the jobs of about ten thousand employees and allow for the orderly transfer of
customer accounts, thereby minimizing further market disruptions. For Barclays, it was a
strategic acquisition that, virtually overnight, would enable it to become a leading player in the
North American capital markets. Given the tumultuous and unpredictable state of the financial
markets at the time, this was a bold business decision for Barclays that required full-time
attention and immediate execution. Everything happened very quickly, and, in retrospect,
especially in light of all of the litigation that has ensued, perhaps too quickly.
The Broker-Dealer Business was "melting." Images of employees leaving with their
office possessions in cardboard boxes portrayed an unplanned exodus of the firm's human
resources; employees quite literally were walking out the door apparently with the expectation of
never returning. Lehman had a desperate need for an expedited sale to preserve jobs and to hold
on to what it could of its going concern value and the firm's intellectual capital. Barclays knew
that it had to act at once and that it had the luxury of leverage because achieving its strategic
objective was optional and would only occur on terms favorable to Barclays.
Barclays was unwilling to allow its transformative corporate vision to potentially impair
its own capital base, especially at a time of such unusual turbulence in the markets. Its board
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instructed management that the transaction could only proceed if it were capital accretive. This
directive from the board of Barclays was not communicated by anyone to the Court. The Court
only knew what could be gleaned from pleadings, the statements of counsel and the evidence
presented at the hearing to approve bidding procedures on September 17 (the "Bid Procedures
Hearing") and the Sale Hearing that commenced on September 19 in the late afternoon and
The Court knew while presiding at the Sale Hearing that everything was happening so
fast that errors, omissions and miscommunications were bound to occur. Also, given the scale
and complexity of the matters being presented and the limited time to process all of this
information, it was impossible to fully comprehend every aspect of the acquisition, which had
changed between the Bid Procedures Hearing on the 17th and the start of the Sale Hearing on
afternoon of the 19th, or to precisely determine the fair value of all of the assets that were being
transferred.
The Court has coined the term the "fog" of Lehman to characterize the confusion,
ambiguity and uncertainty that prevailed during Lehman Week, something akin to the classic
expression the "fog of war." Time was compressed and work was being performed under
inordinately stressful conditions. Many of the smartest and most sophisticated people on Wall
Street were confronting a frightening array of challenges and had to make decisions with
imperfect information, draft documents and act so quickly that events began to blur.
As if describing a scene from a war zone, witness after witness during the trial conveyed
recollections of personal experiences, perceptions and understandings during the chaos and
17
negotiating sessions that were occurring simultaneously in multiple conference rooms at
Lehman's headquarters building at 745 Seventh Avenue and the offices of Weil, Gotshal &
Manges, Lehman's bankruptcy counsel. Coordination was difficult. Just about everyone
involved during this catastrophic week also was sleep deprived and stressed out. No one
individual possibly could have had a complete appreciation for what was taking place during
these marathon negotiating and drafting sessions. Bart McDade, who served as Lehman's chief
negotiator and Harvey Miller, Lehman's lead outside lawyer, probably come the closest to being
the most fully informed at a senior level. They each tell a story of an honest effort to make the
best of a very bad situation, and their testimony does not support relief from the Sale Order.
The APA and the Clarification Letter, the two most centrally important documents in this
chaos by Harvey Miller, a description validated by the testimony of other witnesses. Given the
transaction in general and these two documents in particular were foreseeable, but the Court
finds no support for the proposition that the resulting disclosure problems and disputes were
concealment of relevant information during the Sale Hearing. Instead, it appears that the failure
to provide a coherent and complete narrative of the transaction was circumstantial and not due to
any conscious decision to hide the truth. The need for speed, while not an excuse for inadequate
disclosure, is the best explanation for those lapses in full disclosure at the Sale Hearing that have
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E. The Court Did Not Know About the "Buffer" Required By Barclays or the "Take Out" By
Barclays of the New York Fed, But Knowledge of These Facts Would Not Have Affected
the Sale Order
Movants have changed from supporters to opponents on the basis of information about
the transaction that they assert came to light as a result of discovery conducted after the
conclusion of the appeal to the District Court. In particular, they argue that they are entitled to
relief from the Sale Order because the Court knew nothing about the existence of a multi-billion
dollar discount in the value of acquired financial assets and was not told about a major structural
change to the transaction involving the agreement by Barclays to "take out" Lehman's
obligations to the New York Federal Reserve Bank (the "New York Fed") under a repurchase
agreement that enabled Barclays to achieve its acquisition objective of a $5 billion "buffer"
between the value of acquired assets and related liabilities to the New York Fed.
Indisputably, facts regarding this "buffer" were not disclosed during the Sale Hearing, but
the Court has determined that the revelations on this subject are not entitled to much weight now
because the Court was not concerned, one way or the other, about the existence of a spread
between the value of assets and liabilities. The numbers involved, of course, are huge and
represent a significant potential recovery for the Movants. While evidence of the buffer is
indicative of material information that the Court did not know when it approved the sale, these
disclosures do not support relief from the Sale Order because the overall transaction with
Barclays, notwithstanding the buffer, provided the means for the most favorable disposition of
At the Sale Hearing, no one represented that there was to be any rough equivalence
between the value of assets and liabilities, and the Court did not base its approval of the sale on
19
the $47.4 billion value ascribed to the loosely-described assortment of financial assets that was
being acquired by Barclays. Lori Fife, LBHI's counsel, mentioned that number at the start of the
Sale Hearing to illustrate the sharp and unexpected drop in value from the $70 billion figure that
had appeared a few days earlier in the APA, but that number was referenced only once in
colloquy as an indication of the terrible market conditions during Lehman Week and played no
role whatsoever in the deliberations regarding approval of the sale. That information, however,
did contribute to a greater sense of urgency to proceed immediately with the sale rather than to
run the risk of an even greater drop in values that might result from the forced liquidation of
these assets.
The Court placed considerable reliance on the offers of proof and testimony that
supported approval of the sale and the emphatic endorsements of the transaction made in open
court by representatives of the federal regulators. These representatives of the regulators were
unanimous and unqualified in their support, and the unmistakable impression was that approval
of the APA with Barclays most definitely was in the public interest and was needed to contain
testimony of Barry Ridings of Lazard, that this going concern sale to Barclays manifestly was
more favorable than any other disposition of Lehman's assets. Mr. Ridings stands by that
testimony and offered the same opinion in his video deposition that was played during the trial.
The Court agrees with the position articulated by Barclays that the Court had an adequate record
to support all findings in the Sale Order and that the newly-presented facts, while very significant
to be sure, do not change the essence of the approval process and would not have made any
20
The Court concludes on the basis of the mostly congruent and consistent testimony of
those who took part in the expedited negotiations of this acquisition that the APA and the
Clarification Letter were the product of arm's-length negotiations, that Barclays acted in good
faith (while still pressing hard for the very best deal it could get), and that mark-to-market
valuation judgments during Lehman Week were uncertain at best due to extreme market
volatility. Whatever the Court did not know at the time about the specifics of the sale does not
Greater transparency always is preferable but is not always feasible. The conclusion
reached here is that the disclosure that took place during the Sale Hearing was adequate under
the circumstances and additional disclosure, while highly desirable, would not have made any
difference in the outcome. Also, in evaluating the evidence, the Court thinks that the mismatch
in valuation is something of a red herring. The Movants, in seeking relief from the Sale Order,
have stressed what the Court did not know and the importance to the Court's deliberations of not
having been told about the now-revealed five billion dollar mismatch between the values of the
financial assets and related liabilities, but the Court, having reflected on its role during Lehman
Week, is unconvinced that knowing about the mismatch would have changed anything.
While this was not an "anything goes" situation, the reality is that the transaction with
Barclays would have been approved in any event because, taken as a whole, it was demonstrably
better for all parties than any alternative, and no evidence has been presented to the contrary.
Importantly, the trial record makes clear that Barclays at all times intended for there to be a
generous buffer in its favor with respect to the trading book of acquired financial assets but does
not demonstrate that there was anything improper about the marking down of stale or inflated
asset values or that the amount actually paid for these assets was less than reasonably equivalent
21
value at the time of the sale. That is one of the critical elements of proof missing from the trial
record – there has been a strong implication of duplicitous behavior by certain Lehman
employees or of preferential treatment having been shown to Barclays in the marking down of
the asset values, but it has not been established that the marking down process was arbitrary or
unfair under the atypical market conditions that prevailed during Lehman Week or, perhaps most
importantly, that the aggregate amount paid was not a fair price for these assets.
F. Movants Did Not Establish That Barclays Received an Unfair Gain on the Acquisition
The Court was unimpressed with the opinion testimony presented by the entire team of
expert witnesses retained by the Movants who endeavored to show that Barclays realized a
multi-billion dollar windfall gain. Their opinions were based on a hindsight challenge to the
opinions were effectively challenged on cross-examination and were not convincing. The
opinions, reflecting an unsurprising litigation bias, came across as having been designed and
manufactured for the trial and were not at all persuasive, particularly when compared with the
comprehensive and compelling testimony presented by Barclays' expert witness, Professor Paul
Pfleiderer.
The Court also does not believe that any Lehman employees breached their duties of
loyalty to the estate because of the prospect of future employment or as a consequence of signing
lucrative employment contracts with Barclays. That aspect of the Movants' case is built on a
faint aroma of venality and conflicted loyalty, but no breach of duty or other misconduct was
demonstrated. Despite the insinuations of wrongdoing, the Court concludes that the marking
down of asset values during Lehman Week appears to have been consistent with an attempt,
apparently undertaken in good faith, by employees of both Lehman and Barclays to estimate
22
market values for assets that were difficult to value at a time of extreme uncertainty in the
financial markets. Barclays also may have been endeavoring to increase its buffer and take
advantage of Lehman's vulnerable position at a time when its own negotiating leverage was at its
peak. That may well be true, but the Court does not find that Barclays received assets that
collectively were worth any more in the market than it paid for them.
The Court has made this determination notwithstanding the damaging testimony of
certain witnesses (Martin Kelly for one) from Barclays who were so thoroughly prepared for trial
that it damaged their own credibility. The evidence is clear that traders from Barclays engaged
in an exercise of discounting the value of assets before the Sale Hearing for purposes of lowering
the values assigned to various classes of assets and increasing the so-called "haircut" applicable
to these assets. These activities were a deliberate departure from customary mark-to-market
practices within Lehman and yielded what some have called "liquidation" values (although what
was actually meant by the use of that term is unclear). Movants have stressed that the Court was
not told about this unconventional procedure at the time of the Sale Hearing and have noted the
discrepancy between the term "book value" as used in the APA and these liquidation values that
were privately being developed by the traders. Their point is that Barclays acquired these assets
at an undisclosed discount from Lehman's own regularly updated internal valuations thereby
raising well-founded suspicions as to the fairness of the pricing from Lehman's perspective.
While these facts certainly raise disturbing questions about the accuracy of statements
made at the Sale Hearing as to the real reason that values assigned to the trading assets had
dropped from $70 billion to $47.4 billion, it has not been shown that this ad hoc reduction in
Lehman's marks resulted in a material understatement of realizable fair market values of the
assets within the trading book. This conclusion is bolstered by the fact that many of the assets
23
were complex structured financial products that were difficult to value with any degree of
confidence. The valuation witnesses offered by Barclays, including Stephen King who
impressed the Court with his knowledge of the subject matter, stressed that valuation judgments
as to many asset classes were uncertain and fraught with risk after the LBHI bankruptcy. Given
that uncertainty, the Court is unable to conclude that the "marking down" process, while facially
suspect, actually resulted in an arbitrary or unfair discount relative to fair market value for these
assets or that the discount caused the estate to lose any otherwise realizable value from these
assets.
Barclays' audited Acquisition Balance Sheet prepared under the direction of Gary
Romain is also consistent with a finding that Barclays received and accounted for assets that
were fairly valued (or at least not unfairly valued) and does not show any direct linkage between
the substantial gain on acquisition recognized by Barclays and the book of acquired trading
assets. The Acquisition Balance Sheet, with remarkable symmetry, happens to carry these
trading assets at the very same aggregate number ($45.5 billion) that had been assigned to the
assets as a result of the marking down process within Lehman immediately before the Sale
Hearing.
Movants have questioned the credibility of that astounding coincidence – and astounding
is the right word for it – and have intimated that the numbers used in the Acquisition Balance
Sheet must have been tweaked or adjusted by members of Barclays' Product Control Group as
part of a deliberate effort to lower the basis applicable to the acquired assets in order to create or
boost future trading profits, but it has not been shown by any direct evidence that the numbers
were manipulated in any way or that the Acquisition Balance Sheet is unreasonable in its
depiction of accounting reality, and Movants do not even attempt to show that the audited
24
financial statements of Barclays for the period in question are misleading. Movants have
expressed their doubts regarding the accounting treatment of the acquisition but have not
established that the treatment was inappropriate under applicable accounting standards.
The testimony of the most senior ranking executives from Barclays, former Chairman
John Varley and President (now Chairman) Robert Diamond, confirms that Barclays conditioned
the acquisition on the requirement that it be capital accretive and include substantial negative
good will by operation of applicable accounting principles in the United Kingdom. Barclays
always intended a transaction that would allow it to expand its operations in North America
while augmenting its own balance sheet and allowing it to realize a material first day gain on
acquisition. This self-interested but understandable business reality was not communicated to
The Court believes that no bank, domestic or foreign, at the height of the financial crisis
of 2008, would have considered an acquisition such as this one that was not structured to
minimize risks to the buyer as much as possible, and the Court is not surprised that Barclays, in
pursuing this transformative transaction, was focused on its own objectives and took aggressive
steps to protect itself. To do otherwise would not have been rational. The pivotal question,
however, is whether Barclays took unfair advantage of Lehman and its creditors in connection
with the sale and whether the failures to disclose material variations to the transaction described
in the APA compromised the integrity of the approval process to the point of justifying relief
The record does not support such a conclusion or such negative perceptions of Barclays.
Barclays never agreed to assume any risks relating to Lehman's internal marks and never agreed
25
that the trading assets and liabilities would be in approximate balance with one another. It is
important to note the obvious – this was a quintessential distressed sale, and there was no reason
to regard the transaction as being characterized by equal bargaining power or to assume that the
buyer would treat the seller gently. The seller was in bankruptcy and had no leverage — time
was short, key employees were leaving and the markets were tanking. And to make matters even
worse from the seller's perspective, there were no other buyers. In this tough bargaining
environment, the Court did not need to be told that Barclays was on the scene purely as an
opportunistic "white knight." The only reasonable inference was that Barclays was structuring
an acquisition that had a high likelihood of being very beneficial for Barclays.
Thus, the Court understood, without having to be told in so many words, that this had to
be a very good deal for Barclays, perhaps even an outstanding one, but the Court also perceived
that the transaction was beneficial to the estate because it allowed the Broker-Dealer Business to
remain intact, paid the appraised value for the real estate, and included $250 million for the
intangible attributes of the Broker-Dealer Business. But there were other benefits as well – it
also provided for the orderly transfer of approximately 72,000 customer accounts, avoided a
piecemeal liquidation of assets at a time of turmoil in the financial markets, assumed comp and
cure liabilities and provided for the retention of about ten thousand employees. The fact that the
transaction as modified was structured to also include a spread equivalent to the "haircut"
obtained by the New York Fed in its financing of the operations of LBI during Lehman Week is
new information, but that disclosure does not support relief under Rule 60(b). Rather, it serves
to demonstrate that Barclays, by substituting itself for Lehman with respect to the repo and
becoming a borrower from the New York Fed, adopted a valuation spread that was consistent
26
with financings arranged by the New York Fed during Lehman Week and that followed the
H. While Not Formally Approved, the Clarification Letter Is Enforceable to the Extent
Consistent With the Record of the Sale Hearing
The Sale Hearing came to an end in the early morning hours on Saturday when the Court
issued its bench ruling approving the sale. The Sale Order was entered shortly thereafter, and the
negotiations that produced the Clarification Letter, an agreement that clarifies, modifies and
If there had not been such an urgent need to close right away, it is most likely that the
parties, acting prudently, would have chosen to obtain a separate order approving the
Clarification Letter. That did not happen, but the parties did what they must have believed to be
the next best thing. The agreement was filed on the docket on September 22, 2008, the date it
was finalized, thereby giving broad notice of its terms. Despite such notice and subsequent
proceedings in the bankruptcy court and District Court that referenced this letter, no one within a
period of over two years has ever sought formal approval of the Clarification Letter or a
The parties have relied on the Clarification Letter as a binding and enforceable
transaction document, and so despite the lack of formal approval, the Court is willing to do the
same. Reliance is not, and ordinarily should not be, a substitute for actual approval, but the
combination of circumstances surrounding the execution of the Clarification Letter leads to the
conclusion that it is appropriate to treat this document as if it had been approved. Those parts of
the Clarification Letter that amplify, clarify or bring the transaction into better alignment with
the actual structure of the transaction and agreement of the parties are enforceable to the extent
27
that these provisions are not inconsistent with the record of the Sale Hearing and the language of
The failure to obtain bankruptcy court approval, however, leads to a vexing problem
relating to assets identified during the asset scramble that were added to the definition of
Purchased Assets3 under the APA. One such addition involves the 15c3-3 Assets, securities held
in reserve pursuant to Rule 15c3-3, the Customer Protection Rule promulgated by the United
States Securities and Exchange Commission (the "SEC"). Another change purports to grant
rights to Barclays in the Margin Assets – the Lehman cash held by exchanges as margin to
support the trading and clearance of exchange traded derivatives. The Clearance Box Assets, the
third category of assets claimed by Barclays, facilitate the clearance of securities trading.
Barclays relies on the Clarification Letter in seeking to recover all three categories of assets in its
All of these Disputed Assets were identified as a result of last-minute demands made by
Barclays for additional assets on the morning of the scheduled Sale Hearing with the threat that
Barclays might otherwise be unwilling to close the acquisition. That demand for incremental
value to sweeten the deal was not disclosed during the Sale Hearing, and the Court knew nothing
about this exercise of leverage by Barclays at the eleventh hour. Among other things, the
Clarification Letter reflects the addition of these final "sweeteners" to the deal. For reasons
stated in Section VI of this Opinion, based upon the Court's interpretation of the Clarification
Letter in light of the record of the Sale Hearing, Barclays does not have an unconditional right to
the 15c3-3 Assets and is not entitled to the Margin Assets, but does have a right to the Clearance
Box Assets.
3
The APA defines those assets that Barclays agreed to purchase thereunder as "Purchased Assets."
28
I. The Court's Own Experience During the Sale Hearing Is a Factor That Cannot Be
Ignored in Deciding That Relief Under Rule 60(b) Is Not Warranted and That Barclays Is
Not Entitled to Any "Lehman Cash"
In reaching the conclusions expressed here, the Court does not write on a "clean slate"
and cannot disregard applicable personal experiences from the Sale Hearing. Thus, in addition to
the evidence in these proceedings, the author of this Opinion has his own vivid recollections and
impressions of what occurred during the Sale Hearing and of the atmosphere both in the
courtroom and in the financial markets immediately following the bankruptcy of LBHI. The
events of those early urgent days of the Lehman bankruptcy are sealed forever in the memories
of all participants, including the Court. Because the same individual who presided at the Sale
Hearing also presided during these proceedings, the deliberative process as reflected in this
The Court has applied that experience in considering the facts presented in an extensive
trial record, in deciding that Rule 60(b) relief is not appropriate and in considering claims arising
under the Clarification Letter. The Court is convinced that the deal made and approved so
hurriedly was a good one both for Lehman and Barclays and was the best and only transaction
for the Broker-Dealer Business that could have been accomplished. As detailed here, the Court
has had the privilege of learning a great deal more about the acquisition than it knew or could
have known when it entered the Sale Order. The Court and other parties in interest undoubtedly
would have been better informed if the Sale Hearing had included more disclosures about
changes to the structure and economics of the transaction that occurred after execution of the
APA, but these omissions are not sufficient cause to grant relief from the Sale Order. The 60(b)
Motions were presented well, but, as explained in the following sections of this Opinion, they
29
fail to persuade the Court that grounds exist to undo what has already has been done or to change
Similarly, certain of the claims made by Barclays to obtain even greater economic
benefits from the acquisition based upon the Clarification Letter are directly contradicted by the
declarative statement made and repeated several times during the Sale Hearing that still
resonates. That memorable statement, in plain language, confirmed that no Lehman cash would
be going to Barclays. The Court relied on that clear representation that was given to assure the
Court and parties who had objected to the sale that the assets being acquired by Barclays would
The words used are absolute, unconditional and easily understood without regard to the
language of the APA. "No cash" quite simply means "no cash." The Court has interpreted the
Clarification Letter based on the language used in drafting that agreement and with reference to
the testimony of those who negotiated the language of the document. That interpretation is
influenced by the announcement at the Sale Hearing that Lehman cash would not be going to
Barclays. For that reason, Barclays should not now be entitled to Margin Assets that constitute
Lehman proprietary cash and should return any such cash that it may have received.
The Sale Order was entered during the early morning hours on September 20, 2008. An
appeal (the "Bay Harbour Appeal") from that order by Bay Harbour Management L.C., Bay
Harbour Master Ltd., Trophy Hunter Investments, Ltd., BHCO Master, Ltd., MSS Distressed &
the District Court. See District Court Case Nos. 08-cv-08869, 08-cv-08914. The Movants filed
30
pleadings in the District Court in opposition to the Bay Harbour Appeal.4 On March 13, 2009,
the District Court issued its Opinion & Order affirming the Sale Order. District Court Case No.
08-cv-08869, ECF No. 18; District Court Case No. 08-cv-08914, ECF No. 19. Bay Harbour
pursued a further appeal of this decision, but ultimately abandoned its efforts to obtain relief
from the United States Court of Appeals for the Second Circuit (the "Second Circuit"). On May
28, 2009, the Clerk of Court of the Second Circuit entered an order dismissing the appeal due to
Bay Harbour's failure to respond to the Second Circuit's prior order to show cause. See District
Court Case No. 08-cv-08869, ECF No. 21. At that point, the Sale Order became final and no
Despite the procedural finality of the Sale Order, LBHI initiated a discovery process that
marked the beginning of efforts to obtain relief from the Sale Order. The Court observed a
preview of this discovery initiative at a December 22, 2008 hearing on a motion to approve a
settlement agreement (the "Settlement Agreement") between Barclays, LBI and JPMorgan Chase
("JPMorgan"), LBI's collateral agent. The Settlement Agreement was the result of long
high-level and high-stakes dispute between Barclays and JPMorgan that eventually required the
intervention (at Barclays' request) of the New York Fed. M Ex. 119A (Leventhal Decl.) ¶ 21;
4
In addition to LBHI's counter-designations of bankruptcy record on appeal, LBHI filed Answering Brief of
Lehman Brothers Holdings Inc., et al. in Opposition to Bay Harbour Appeal, and the SIPA Trustee filed Brief of
Appellee James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers Inc. District Court Case No.
08-cv-08869, ECF Nos. 4, 5, 8, 12; District Court Case No. 08-cv-08914, ECF Nos. 3, 4, 10, 13; BCI Ex. 33 (M Ex.
405); M Ex. 552. The Committee did not participate in the Bay Harbour Appeal. The Committee did, however, file
a Counter-Statement of Official Committee of Unsecured Creditors of Issues Presented on Appeal and Counter-
Designation of Additional Items to be Included in the Record on Appeal in the later-withdrawn appeal of a group of
creditors that called themselves the Informal Noteholder Group. District Court Case No. 08-cv-09108, ECF No. 5;
BCI Ex. 398.
31
The dispute centered around a $7 billion "box loan" provided by JPMorgan to LBI in
connection with the so-called Lehman III transaction.5 The $7 billion was transferred into
Barclays' account at JPMorgan and then later removed by JPMorgan, allegedly due to Barclays'
failure to renew a $15.8 billion repurchase agreement secured by Lehman assets. This caused
LBI to have to borrow $15.8 billion from JPMorgan. JPMorgan wanted Barclays to "take out"
this financing in a similar fashion to what Barclays had done with respect to a repurchase
agreement between LBI and the New York Fed.6 See 6/21/10 Tr. 201:5-202:8 (Diamond);
9/7/10 Tr. 152:1-153:21 (Leventhal). Barclays realized that the $7 billion was not in its account
after the sale transaction had closed and the Clarification Letter had been signed. M Ex. 119A
(Leventhal Decl.) ¶¶ 19-21; M Ex. 119C (LaRocca Decl.) ¶ 11; 9/7/10 Tr. 27:19-22, 133:23-
After Barclays and JPMorgan (with the help of the New York Fed) reached agreement,
the parties sought the help of the SIPA Trustee in filing a motion to seek approval of the
settlement. See M Ex. 642. Barclays, JPMorgan and LBI signed the Settlement Agreement on
December 5, 2008; on that same day, the SIPA Trustee filed a motion seeking approval of the
The Committee, which had been given only a cursory preview of the Settlement
Agreement, filed an objection to the Settlement Motion on December 19, 2008. See M Ex. 852;
M Ex. 860; BCI Ex. 37 (M Ex. 398). The Committee raised specific concerns about alleged
undisclosed changes made to the sale transaction following entry of the Sale Order. BCI Ex. 50
(M Ex. 262) (12/22/08 Tr.) 45:11-50:7 (Kirpalani, Peck). At the hearing on the Settlement
5
The Lehman III transaction and the circumstances surrounding the $7 billion “box loan” are discussed infra at 42-
45.
6
The repurchase agreement between LBI and the New York Fed, defined as the “Fed Repo,” and Barclays'
agreement with the New York Fed to “take out” its financing obligation thereunder are discussed infra at 41-45.
32
Motion, LBHI expressed similar concerns, but did not object to the settlement because the
proposed order did not bar any future discovery or claims. BCI Ex. 50 (M Ex. 262) (12/22/08
Tr.) 32:6-34:21 (Miller). Counsel to JPMorgan and Barclays confirmed that the settlement
would not pose any collateral estoppel effect and that parties would be free to pursue claims
related to the "overall sales transaction." BCI Ex. 50 (M Ex. 262) (12/22/08 Tr.) 35:3-5, 40:9-11,
41:7-12 (Schiller), 39:13-20 (Novikoff). The Court approved the Settlement Motion
based on the record and the representations that have been made including the comments
confirming that the settlement is not to have collateral estoppel impact that would
preclude further investigation of the circumstances surrounding the original sales
transaction between the estates and Barclays Capital approved by order entered
September 20[, 2008].
On May 18, 2009, some five months after approval of the Settlement Agreement, LBHI
filed a motion of for an order authorizing discovery from Barclays. (the "2004 Motion"). Case
No. 08-13555, ECF No. 3596. In the 2004 Motion, LBHI sought discovery related to the sale to
Barclays "specifically focused on whether the estate received appropriate value." 2004 Motion ¶
1. Each of the Committee and the SIPA Trustee subsequently filed papers joining in the 2004
Motion. Case No. 08-13555, ECF No. 3778 (Committee); Case No. 08-13555, ECF No. 4074
(SIPA Trustee). Barclays opposed the 2004 Motion. Case No. 08-13555, ECF No. 3776.
After a hearing on June 3, 2009, the Court granted the 2004 Motion and entered an order
authorizing discovery (the "Discovery Order"). Case No. 08-13555, ECF No. 4164. The
Discovery Order granted the relief requested in the 2004 Motion, and led to an extensive
examination of the facts surrounding the sale of the Broker-Dealer Business to Barclays. This
discovery became the basis for the filing of the 60(b) Motions.
33
On September 15, 2009, one year to the day after LBHI filed its voluntary bankruptcy
petition, each of LBHI, the Committee and the SIPA Trustee7 moved for relief from the Sale
Order by filing separate motions under Rule 60(b).8 Case No. 08-13555, ECF No. 5148 (the
"LBHI Motion"); Case No. 08-13555, ECF No. 5169 and Case No. 08-01420, ECF No. 1686
(collectively, the "Committee Motion"); Case No. 08-01420, ECF No. 1682 (the "SIPA Trustee
Motion") . Since that date, the parties have worked together cooperatively to coordinate and
manage the 60(b) litigation and related adversary proceedings as described below. Given the
complexity and importance of the issues presented, the case is a model of efficient case
management. All counsel worked with each other and with the Court in a manner that
On October 27, 2009 the Court entered a scheduling order concerning these motions (the
"Scheduling Order"). Case No. 08-13555, ECF No. 5636; Case No. 08-01420, ECF No. 1989.
The Scheduling Order contemplated the possible filing of adversary complaints in relation to the
60(b) Motions, and set a deadline of November 16, 2009 for commencing these actions. The
Scheduling Order set forth other deadlines and agreements of the parties relating to the
prosecution and management of this litigation, including dates by which Barclays would submit
its consolidated opposition to the 60(b) Motions and would file its motion to enforce the Sale
7
The SIPA Trustee's motion addresses both the Sale Order and the Order Approving, and Incorporating by
Reference for the Purposes of this Proceeding, and Order Authorizing the Sale of Purchased Assets and Other Relief
in the Lehman Brothers Holdings Inc. Chapter 11 Proceeding (the “SIPA Sale Order”). Case No. 08-01420, ECF
No. 3.
8
The SIPA Trustee also filed a motion to join in LBHI's 60(b) motion. Case No. 08-13555, ECF No. 5173. LBHI
filed its own 60(b) motion addressing the SIPA Sale Order. Case No. 08-01420, ECF No. 1702.
34
On November 16, 2009, each of the Movants filed an adversary complaint (each, an
"Adversary Complaint" and collectively, the "Adversary Complaints") under Fed. R. Bankr. P.
Lehman Brothers Holdings, Inc. v. Barclays Capital Inc. (the "LBHI Adversary"), Adv.
Proc. No. 09-01731(JMP);
James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers Inc. v.
Barclays Capital Inc. (the "SIPA Trustee Adversary"), Adv. Proc. No. 09-01732(JMP);
and
The Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc., et al.
v. Lehman Brothers Holdings Inc., Lehman Brothers Inc., LB 745 LLC and Barclays
Capital Inc. (the "Committee Adversary"), Adv. Proc. No. 09-01733(JMP).
As the parties anticipated in the Scheduling Order, each Adversary Complaint to some
extent overlaps with one or more of the 60(b) Motions, and so the parties have entered into a
stipulation (the "Adversary Proceeding Stipulation") providing for the resolution of certain
claims in the Adversary Complaints in conjunction with resolution of the 60(b) Motions and
deferring certain claims for further adjudication. The Adversary Proceeding Stipulation was "so
ordered" by the Court. Adv. Proc. No. 09-01731, ECF No. 4; Adv. Proc. No. 09-01732, ECF
The Adversary Proceeding Stipulation provides that (i) the following claims in each
respective Adversary Proceeding shall be resolved through the resolution of the 60(b) Motions,
(ii) the 60(b) Motions (and all documents filed in connection therewith, including any opposition
papers submitted by Barclays) shall be treated as dispositive motions with respect to the listed
claims and (iii) any evidentiary hearing that is required by the Court to resolve the 60(b) Motions
35
Bankruptcy Code §§ 542 and 559), Count VI (Disallowance of Claims Under Bankruptcy
Code § 502(d), and Count IX (Declaratory Judgment – 28 U.S.C. §§ 2201, 2202);
In the SIPA Trustee Adversary: Count I (Declaratory Judgment Under 28 U.S.C. § 2201
– DTCC Clearance Box Assets), Count II (Declaratory Judgment Under 28 U.S.C. §
2201 – OCC Margin and Clearing Funds), Count III (Declaratory Judgment Under 28
U.S.C. § 2201 – Funds at Other Exchanges), Count IV (Declaratory Judgment Under 28
U.S.C. § 2201– $769 Million in Rule 15c3-3 Securities or Substantially Similar
Securities), Count V (Avoidance of Transfers and Recovery of Property under §§ 549 and
550 of the Bankruptcy Code), Count VII (Turnover of Property under § 542 of the
Bankruptcy Code), Count VIII (Recovery of Approximately $1.1 Billion in DTCC
Clearance Box Securities Under § 548 of the Bankruptcy Code), Count IX (Fraudulent
Conveyance Under § 273 of the New York Debtor & Creditor Law, as Made Applicable
by § 544(b) of the Bankruptcy Code), Count X (Recovery of the Excess Value of the
Repo Securities Under §§ 559 and 542 of the Bankruptcy Code), and Count XIV
(Disallowance of Claims Under § 502(d) of the Bankruptcy Code); and
In accordance with the Scheduling Order, on January 29, 2010, Barclays opposed the
60(b) Motions and filed its motion addressed to the SIPA Trustee to enforce the Sale Order and
secure the delivery of the Disputed Assets (the "Barclays Motion"). Case No. 08-13555, ECF
No. 6814; Case No. 08-01420, ECF No. 2581. On March 18, 2010, each of the Movants filed a
reply memorandum in further support of their 60(b) Motions and, in the case of the SIPA
Trustee, in opposition to the Barclays Motion. Case No. 08-13555, ECF No. 7641 and Case No.
08-01420, ECF No. 2843 (collectively, the "LBHI Response"); Case No. 08-13555, ECF No.
7667 and Case No. 08-01420, ECF No. 2857 (Committee); Case No. 08-01420, ECF No. 2847
(SIPA Trustee). Barclays completed the initial round of briefing on the 60(b) Motions on April
5, 2010 with the filing of its reply memorandum in further support of the Barclays Motion. Case
No. 08-13555, ECF No. 8076; Case No. 08-01420, ECF No. 2996 (the "Barclays Reply").
36
On April 9, 2010, the Court heard oral argument on the 60(b) Motions and the Barclays
Motion. At the outset of this hearing, the Court noted that it would not be deciding the 60(b)
Motions on the papers, that an evidentiary hearing would be necessary and that arguments on the
Motions would be treated as opening arguments for the evidentiary hearing. 4/9/10 Tr. 10:20-24
(Peck).
April 26, 2010 was the first day of what developed into a 34-day trial. The Court heard
live testimony from 37 witnesses9 and admitted 1,787 exhibits (some for limited purposes) into
the record. On November 22, 2010, each of the Movants and Barclays filed a post-trial
memorandum, including proposed findings of fact and conclusions of law.10 Case No. 08-13555,
ECF No. 12950 and Case No. 08-01420, ECF No. 3909 (collectively, the "LBHI Post-Trial
Memorandum"); Case No. 08-13555, ECF No. 12970 and Case No. 08-01420, ECF No. 3916
(collectively, the "Committee Post-Trial Memorandum"); Case No. 08-13555, ECF No. 12971
and Case No. 08-01420, ECF No. 3917 (collectively, the "Barclays Post-Trial Memorandum");
Case No. 08-01420, ECF No. 3911 (the "SIPA Trustee Post-Trial Memorandum").
III. The Rule 60(b) Standard and Background of Movants' 60(b) Claims
Rule 60(b) applies in all cases under the Bankruptcy Code, except for certain
circumstances not relevant to this decision. Fed. R. Bankr. P. 9024. Rule 60(b) lists multiple
grounds upon which a court may relieve a party from final judgment, including:
9
The Court also heard video deposition testimony from four witnesses, and read designated deposition testimony
from eighteen witnesses.
10
The SEC and the Securities Investor Protection Corporation (“SIPC”) also filed post-trial memoranda. Case No.
08-13555, ECF No. 12961 and Case No. 08-01420, ECF No. 3914 (collectively, the "SEC Post-Trial
Memorandum"); Case No. 08-01420, ECF No. 3912 (SIPC).
37
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier
judgment that has been reversed or vacated; or applying it prospectively is no
longer equitable; or
(6) any other reason that justifies relief.
Rule 60(b) "should be liberally construed when substantial justice will … be served." In
re Enron Corp., 352 B.R. 363, 369 (Bankr. S.D.N.Y. 2006) (quoting Radack v. Norwegian
America Line Agency, Inc., 318 F.2d 538, 542 (2d Cir. 1963)). However, courts should not
"lightly reopen[]" final judgments under Rule 60(b). Nemaizer v. Baker, 793 F.2d 58, 61 (2d Cir.
1986) (citations omitted). Thus, such a motion generally is "not favored and is properly granted
only upon a showing of exceptional circumstances." Enron, 352 B.R. at 369 (quoting U.S. v.
Int'l Bhd. of Teamsters, 247 F.3d 370, 391 (2d Cir. 2001)). A motion seeking 60(b) relief is
"addressed to the sound discretion of the [trial] court with appellate review limited to
determining whether that discretion has been abused." Nemaizer, 793 F.2d at 61-62 (citations
omitted).
Movants seek relief under four separate subsections of Rule 60(b) – 60(b)(1) (mistake,
intentional misrepresentation or fraud by an opposing party) and 60(b)(6) (fraud by any other
party or fraud on the court). LBHI Mot. ¶¶ 145-170; Committee Mot. ¶¶ 63-77; SIPA Trustee
Mot. 89-105. Movants also reference Federal Rule of Civil Procedure 60(d), which provides that
"[Rule 60]" does not limit a court's power to, inter alia, "set aside a judgment for fraud on the
All of these claims are based on the allegation that certain crucial facts surrounding the
sale to Barclays were not disclosed to the Court. Movants submit that such a failure to disclose
38
at best qualifies as mistake, inadvertence or excusable neglect under Rule 60(b)(1). LBHI Resp.
thus bringing their claims under the purview of Rule 60(b)(3), 60(b)(6) and/or 60(d). LBHI
Resp. ¶ 150, n. 63. During the trial, Movants focused on three broad categories of "mistake"
surrounding the sale – (i) Barclays' multi-billion dollar day-one gain on the sale, (ii) the non-
disclosure to the Court of the structural shift from the purchase of assets described in the APA to
the "take out" by Barclays of the New York Fed and (iii) the actual amounts paid for
compensation obligations and contract cures in comparison with the much higher estimated
amounts disclosed to the Court at the Sale Hearing.11 Movants base their Rule 60(b)(2) claim on
the allegation that they were justifiably ignorant of these "mistakes" despite their reasonable
A. The Acquisition Gain and the Changing Character and Structure of the Sale
At trial, the parties spoke of and characterized three separate negotiated structures of an
asset purchase by Barclays, described in shorthand as Lehman I, Lehman II and Lehman III. The
business and commenced either late Thursday, September 11, 2008 or early Friday, September
12, 2008. 4/26/10 Tr. 145:10-146:7 (McDade). Those discussions ended on Sunday, September
14, 2008, when Barclays informed Lehman of its "inability to consummate" the transaction.
4/26/10 Tr. 146:21-147:1 (McDade); 6/21/10 Tr. 137:7-12 (Diamond); 6/22/10 Tr. 81:9-11
(Varley). That inability was followed almost immediately by the filing by LBHI of its
11
By virtue of the SIPA Trustee's Joinder, he is a party to this argument, but he also bases his 60(b) claims, at least
in part, on issues surrounding the Clarification Letter. These claims are discussed on pages 97-99 of this Opinion.
39
bankruptcy petition on September 15, 2010. 4/28/10 Tr. 11:12-18 (Miller); Case No. 08-13555,
ECF No. 1.
September 15. 4/26/10 Tr. 146:21-147:3 (McDade); 4/28/10 Tr. 11:12-21 (Miller). Lehman II is
the transaction for the acquisition of the Broker-Dealer Business reflected in the APA; the
negotiations surrounding Lehman II took place in a compressed time frame, and, as described by
participants, were conducted within a "scene of organized chaos" and with a "sense of frenzy,
distress." 4/28/10 Tr. 11:22-12:21 (Miller); 4/29/10 Tr. 15:18-18:11 (Lowitt); BCI Ex. 365
(Lowitt Decl.) ¶7. The negotiations continued into the early morning hours of September 16,
2008, when the parties signed the APA. 4/26/10 Tr. 150:14-24 (McDade); 4/28/10 Tr. 150:17-
151:15 (Kelly); 4/29/10 Tr. 63:4-20, 77:13-18 (Lowitt); 4/27/10 Tr. 110:8-111:7 (Berkenfeld);
Movants contend that during the course of the negotiations, certain Lehman executives
(who were given offers of employment by Barclays) agreed to prices for Lehman's assets that
were fixed below Lehman's marks. Barclays counters that because Lehman last closed its books
on September 12, 2008, the Lehman marks were stale and needed to be adjusted to account for
the impact of the events of Lehman Week on the financial markets. See, e.g., 4/29/10 Tr. 93:6-
17 (Lowitt) (traders from both Lehman and Barclays were meeting to agree on "what was the
appropriate value for those securities given the nature of the environment and the market they
were dealing with … [and] there was a difference between what was on [LBHI's] books and what
was the outcome of that process … [of] around five billion dollars").
40
Regardless of the reasons given for the mark-down procedure, the evidence shows that
the parties had negotiated a value for the Purchased Assets that was discounted from Lehman's
marks by approximately $5 billion. M Ex. 7 (9/16/08 e-mail from Martin Kelly to Ian Lowitt
and Paolo Tonucci at the conclusion of the negotiations for Lehman II, stating that the "[f]inal
price did not change meaningfully – approx a $5b all in economic loss versus our marks");
4/28/10 Tr. 155:12-18 (Kelly) (explaining that $5b all in economic loss means that "the
transaction included an approximately five billion dollar difference between the values that had
been negotiated for the assets that were moving, and their most recent book values on the books
of Lehman").
Before the APA was presented to the Court for approval, the New York Fed had agreed
to provide financing to LBI through a series of short-term funding agreements (collectively, the
"Fed Repo") so that LBI could continue to operate as a broker-dealer for a limited period of time.
Stip.12 ¶¶ 130,165. As part of the Fed Repo, LBI had to post collateral to the New York Fed.
Stip. ¶ 131. As is typical in repo transactions, the New York Fed required LBI to post as
collateral securities valued in excess of the principal amount advanced by the New York Fed.
Stip. ¶ 132. The amount by which the value of securities transferred exceeds the amount paid for
them is referred to as a "haircut." Stip. ¶ 133. The "haircut" is measured at market value. 9/7/10
By the close of business on Wednesday, September 17, LBI had posted collateral valued
at approximately $50.62 billion in exchange for financing from the New York Fed of
approximately $46.22 billion. M Ex. 119A (Leventhal Decl.) ¶ 9. This "haircut" reflected excess
12
All references to “Stip.” as used herein shall be to the Stipulations of Fact agreed to and signed by the parties in
April 2010. See 4/26/10 Tr. 73:3-13 (Gaffey) (describing Stipulations of Fact to the Court).
41
collateral of $4.4 billion. See Tonucci Dep. Tr. 17:5-15 (describing a "haircut" as "the difference
When the New York Fed learned that Barclays planned to purchase the Broker-Dealer
Business, it became insistent that it be relieved of its short-term financing role for LBI and that
Barclays take on the role of providing such financing to LBI.13 Stip. ¶ 134; see also 4/29/10 Tr.
(Leventhal). This arrangement in which Barclays became the source of financing to LBI is the
transaction termed Lehman III – the transaction that actually was consummated but that was not
In order to facilitate the Lehman III transaction, the New York Fed agreed to provide
Barclays with financing and a cash advance. See M Ex. 844 (describing financing mechanism);
9/7/10 Tr. 103:3-105:5 (Leventhal). Barclays relieved the New York Fed of its short-term
financing role by means of a repurchase agreement between LBI and Barclays (the "September
On the morning of September 18, 2008, steps were taken to effect the transition from the
Fed Repo to the September 18 Repurchase Agreement. This involved unwinding the Fed Repo,
and the return by the New York Fed to LBI of securities that had been pledged as collateral.
Later that day, pursuant to the September 18 Repurchase Agreement, Barclays forwarded to LBI
approximately $45 billion in cash (its advance from the New York Fed) and LBI was to post as
13
By September 16, 2008, Barclays had negotiated the terms of an agreement with the New York Fed (the “Take-
Out Agreement”). See M Ex. 874 (e-mail sent at 1:37 a.m. on September 17, 2008 from the New York Fed to
counsel to Barclays attaching draft of Take-Out Agreement). Under the terms of the Take-Out Agreement, which
was signed on September 17, 2008, Barclays agreed to purchase from the New York Fed the entirety of its positions
in the Fed Repo in exchange for all of the collateral posted in connection therewith. BCI Ex. 4 (M Ex. 348). The
Court knew nothing about the Take-Out Agreement at the time of the Sale Hearing.
42
"haircut" in the value of LBI's collateral. See M Ex. 119A (Leventhal Decl.) ¶¶ 10-12; 9/7/10 Tr.
118:25-122:13 (Leventhal); Stip. ¶ 136. When asked to review the pool of collateral Barclays
was to take over from the New York Fed, Stephen King concluded that Barclays would be
sufficiently collateralized in loaning $45 billion against this pool of securities.14 8/25/10 Tr.
Due to operational problems, by the close of business on September 18, LBI had not
transferred all of the pledged collateral to Barclays. Instead of approximately $50 billion in
collateral, LBI transferred at least $42.7 billion15 in collateral under the September 18
Repurchase Agreement. M Ex.119A (Leventhal Decl.) ¶ 14; 4/30/10 Tr. 183:18-184:7 (Hughes);
4/29/10 Tr. 272:4-24 (Clackson). To make up the difference, LBI took a so-called "box loan" of
LBI's clearance boxes at JPMorgan. M Ex. 36; M Ex. 50; M Ex. 66; 9/7/10 Tr. 122:21-123:17
(Leventhal); 4/30/10 Tr. 183:18-184:7 (Hughes). LBI paid the full cash proceeds of this loan
over to Barclays as a replacement for the portion of collateral that could not be transferred on
September 18.16 Hraska I Dep. Tr. (8/14/09) 50:8-22; 9/7/10 Tr. 24:9-28:2 (Leventhal); 4/30/10
Tr. 183:18-184:7 (Hughes). Thus, Barclays received at least $49.7 billion in collateral and cash
14
Barclays later claimed that it was worried about the value of the securities posted as collateral for the September
18 Repurchase Agreement, and threatened not to close if Lehman did not come up with more assets. See Section
VI.A of this Opinion for a description of the so-called "asset scramble."
15
Bank of New York, as Barclays' collateral agent, valued the transferred collateral at approximately $45 billion. M
Ex. 102; 8/25/10 Tr. 157:17-158:3 (King).
16
See 31-33, supra, for a discussion regarding the ensuing dispute between JPMorgan and Barclays over this $7
billion.
43
to secure LBI's obligations for the $45 billion advanced to it under the September 18 Repurchase
On September 19, 2008, pursuant to a Complaint and Application of SIPC, the District
Court entered an Order Commencing Liquidation, which (i) found that the customers of LBI
were in need of the protection afforded by SIPA, (ii) appointed a trustee "for the liquidation of
the business of LBI with all the duties and powers of a trustee as prescribed in SIPA" and (iii)
referred the liquidation proceeding (the "SIPA Liquidation Proceeding") to this Court. Case No.
08-1420, ECF No.1. The SIPA Liquidation Proceeding constituted a defined event of default
under the September 18 Repurchase Agreement. BCI Ex. 8 (M Ex. 4) (Master Repurchase
Agreement) ¶¶ 2(a), 11; M Ex. 38 (Notice of Termination). As a result of that default, Barclays
Ex. 38.
Barclays claims that the issuance of the Notice of Termination was inadvertent or a
mistake. 8/31/10 Tr. 64:23-65:8 (Lewkow) (recalling "being told at some point" that "some back
office person" unintentionally sent notice); Lewkow Dep. Tr. 68:17-69:14. The parties
addressed the issue after the Sale Hearing, when they continued their negotiations over the
following weekend. They included a paragraph in the Clarification Letter that purported to
rescind the earlier termination and then terminate the September 18 Repurchase Agreement
17
From the Court's perspective, the fact that Barclays had effectively “purchased” these assets one day before
commencement of the Sale Hearing is troublesome, to say the least. While no improprieties have been shown, it is
curious that any financial institution would take on any exposure at a time of such upheaval in the markets prior to
the entry of a court order approving the acquisition.
44
to each other under the [September 18] Repurchase Agreement …,
and (iii) the [September 18] Repurchase Agreement shall
terminate. Additionally, the Notice of Termination relating to the
[September 18] Repurchase Agreement dated September 19, 2008
is hereby deemed rescinded and void ab initio in all respects.
As a result of the insertion of this paragraph, all of the collateral pledged in connection
with the September 18 Repurchase Agreement – including the $5 billion "haircut" that under
Section 559 of the Bankruptcy Code otherwise would have had to be returned to the LBI estate –
was transferred to Barclays. Thus, upon the signing of the Clarification Letter, Lehman III was
consummated and Barclays maintained a gain on acquisition equivalent to what it had negotiated
under Lehman II. It is important to note, however, that the Court did not know at the Sale
Hearing that the structure of the transaction had changed from Lehman II to Lehman III.
To guide the documentation of the sale to Barclays, during the course of Lehman Week
the parties prepared a schedule showing the value of certain assets that were to be transferred to
Barclays and the liabilities to be assumed by Barclays (the "9/16/08 Financial Schedule"). BCI
Ex. 106 (M Ex. 2); 4/27/10 Tr. 115:2-10, 118:12-16, 123:19-124:22 (Berkenfeld); see also
8/31/10 Tr. 36:9-23 (Lewkow) (describing Berkenfeld signing 9/16/08 Financial Schedule);
Two categories of liabilities on the 9/16/08 Financial Schedule are "Comp" and "Cure Pmt."
Paragraph 9.1(c) of the APA addresses the obligation of Barclays to pay 2008 bonuses to
Transferred Employees – i.e., former Lehman employees who transferred to Barclays – and
expressly references the 9/16/08 Financial Schedule. BCI Ex. 1 (M Ex. 1) ¶ 9.1(c); BCI Ex. 106
(M Ex. 2); 4/26/10 Tr. 177:17-180:23 (McDade); 8/23/10 Tr. 89:15-92:4 (Shapiro); 8/31/10 Tr.
45
97:2-9 (Lewkow); 8/24/10 Tr. 27:16-28:4 (Exall); M Ex. 24. Thus, the aggregate amount of
such 2008 bonus payments was established by the $2 billion figure set forth on the 9/16/08
Financial Schedule. BCI Ex. 106 (M Ex. 2); 4/26/10 Tr. 168:13-169:9, 177:17-180:23
(McDade); 8/24/10 Tr. 27:16-28:4 (Exall). The plain language of the Paragraph 9.1(c) of the
APA specifically refers only to bonuses, not severance.18 Moreover, the $2 billion figure for
bonuses was an "agreed number" that reflected a "full requirement for Barclays to pay." 4/26/10
Barclays contends, however, that it can (and did) satisfy this obligation by including in
the total payments of severance, taxes and other forms of compensation and argues that
Lehman employees for their pre-acquisition services (the 'Exall Spreadsheet'), Barclays has paid
or promised to pay for 2008 approximately $1.66 billion in bonuses, $265 million in severance
payments, and approximately $21 million in taxes." Barclays Mot. ¶ 300. According to
Barclays, "[t]hese liabilities total $1.946 billion, an amount fully consistent with the $2 billion
estimate of the parties." Barclays Mot. ¶ 300; see also 8/23/10 Tr. 189:2-194:8 (Exall); 8/24/10
Tr. 8:21-9:17, 61:11-62:22 (Exall) (discussing prepared chart showing total for bonus, severance
Mr. Exall, the executive charged with monitoring the compensation paid to former
Lehman employees who transferred to Barclays, was instructed immediately after the closing of
the sale to plan on paying bonuses to former Lehman employees of approximately $1.4 billion,
not the $2 billion set forth in the APA. See BCI Ex. 295 (M Ex. 91) at 2; 8/24/10 Tr. 45:5-13
18
Paragraph 9.1(b) of the APA separately defines the obligation of Barclays to make severance payments to
Transferred Employees who were later laid off. Paragraph 9.1(b) does not reference the 9/16/08 Financial Schedule.
See 8/24/10 Tr. 28:5-19 (Exall); 8/23/10 Tr. 92:5-94:23 (Shapiro) (describing having reviewed the APA to ensure it
accurately reflected the deal, and noting that Paragraph 9.1(b) does not refer to the 9/16/08 Financial Schedule);
Brown Dep. Tr. 20:15-22 (“$2 billion really related to subsection c”).
46
(Exall); M Ex. 92 at 2; M Ex.130 (9/16/08 e-mail reflecting $1.3 billion "bonus accrual"); M
Ex.134 (9/17/08 e-mail, showing $1.3 billion "bonus accrual"); M Ex. 43 (9/18/08 e-mail to
Ricci stating that "[w]e have assumed only $1.5bn of comp accrual is required rather than $2bn
in completion balance sheet"). Exall's team prepared twice-daily reports tracking bonus
payments. 8/24/10 Tr. 46:4-47:11 (Exall). Exall also prepared a spreadsheet showing that, in the
aggregate, Barclays paid to transferred Lehman employees approximately $1.951 billion in all
forms of compensation. M Ex.107; 8/24/10 Tr. 8:21-9:17, 65:18-66:2 (Exall). Several entries on
the spreadsheet, however, do not relate to bonuses.19 BCI Ex. 142A (M Ex. 107); 8/24/10 Tr.
141:5-144:12, 151:15-23. In the end, subtracting out all non-bonus payments, Barclays paid
approximately $1.5 billion in bonuses to Transferred Employees. BCI Ex. 142A (M Ex. 107).
As set forth in the 9/16/08 Financial Schedule, the estimated cost of cure payments to be
assumed by Barclays was $2.25 billion. BCI Ex. 106 (M Ex. 2). Martin Kelly was the Lehman
executive responsible for estimating the amount of cure liabilities that Barclays would pay.
4/27/10 Tr. 52:13-18 (McDade); 4/29/10 Tr. 90:17-92:19, 121:24-122:17 (Lowitt); 8/23/10 Tr.
94:23-95:20 (Shapiro) (explaining that the estimate was prepared to answer an inquiry by Cox
from Barclays); 6/22/10 Tr. 224:18-225:11 (Cox) (stating that cure estimates came from Martin
Kelly). As of September 16, 2008, Kelly came up with an estimate for cure of $2.25 billion, the
number set forth on the 9/16/08 Financial Schedule. 4/26/10 Tr. 161:11-19, 163:8-169:10
(McDade).
19
For example, Exall's chart reflects Barclays' payments to various taxing authorities in the total amount of
approximately $71 million. M Ex. 107. These taxes were not paid to individual employees, but rather to the
applicable taxing authority. 8/24/10 Tr. 67:4-68:9, 70:14-71:4, 71:16-72:5 (Exall). This includes some $50 million
included in Exall's entry for “Bonus including social tax.” M Ex. 107; 8/24/10 Tr. 70:11-71:15 (Exall).
47
By the time of the September 17, 2008 hearing on the Debtors' Motion to (A) Schedule a
Sale Hearing; (B) Establish Sale Procedures; (C) Approve a Break-Up Fee; and (D) Approve the
Sale of the Purchased Assets and the Assumption and Assignment of Contracts Relating to the
Purchased Assets (the "Bid Procedures Motion"), the cure liability estimate had declined to
$1.5 billion – the number that was disclosed to the Court. BCI Ex. 11 (M Ex. 118) ¶ 14
(explaining that "[t]he parties estimate that the cure costs associated with such assumptions and
assignments will be approximately $1.5 billion"); 4/26/10 Tr. 161:20-23 (McDade); BCI Ex. 48
(M Ex. 260), 9/17/08 Tr. 24:1-5 (Miller) (stating that "in connection with the assumption and
assignment of contracts, the cure amounts and other payments in connection with the contracts,
Barclays, however, had its own estimate of $200 million for cure payments related to
contracts that it deemed to be "mission critical." BCI Ex. 107 (M Ex. 11); 6/22/10 Tr. 225:16-
229:15 (Cox) (confirming that his notes in M Ex. 11 read, in pertinent part, that "[t]he 200 mill is
for more than 3,000 contracts mission critical[,]"acknowledging that Barclays' liability for
mission-critical contracts had been estimated at $200 million and conceding that there was a
swing of roughly $1.3 billion of what was told to the Court). Barclays' $200 million estimate
was never disclosed to the Court. 6/22/10 Tr. 228:19-229:15, 205:2-3, 206:4-24 (Cox). By
September 19, 2008, Barclays had developed internally an "official line" regarding cure
payments – namely, that they "are optional and tho [sic] some will be incurred, most will be
covered by our ongoing supplier relationships and fall into monthly expenses." M Ex. 41;
4/30/10 Tr. 16:3-12 (Clackson). Ultimately, after taking over the Broker-Dealer Business,
Barclays paid only $238,200,978 in cure liabilities through July 14, 2009. Stip. ¶¶ 128, 152,
48
162; see BCI Ex. 133 (M Ex. 105) at 00115845 line 41; 9/2/10 Tr. 41:23-42:1, 47:2-25
(Romain).
On September 17, 2008, LBHI and LB 745 LLC filed the Bid Procedures Motion,
seeking approval of the sale to Barclays. BCI Ex. 11 (M Ex. 118). The Bid Procedures Motion
describes the sale to Barclays as a transaction that was to be consummated on the terms and
conditions set forth in the APA. BCI Ex. 11 (M Ex. 118) ¶ 5. Because events were taking place
so quickly and the elements of Lehman III had not yet fallen into place, the Bid Procedures
Motion does not disclose the existence or set forth the terms of Lehman III, nor does it reveal a
discounted price for the Purchased Assets or clarify the estimates for compensation and cure
On that same day, the Court held the Bid Procedures Hearing. At that hearing, counsel to
Lehman described the nature and overall value of the sale to the Court in connection with a
request for a break-up fee and outlined the components of the Lehman II transaction. BCI Ex. 48
(M Ex. 260) (9/17/08 Tr.) 22:8-24:17 (Miller). The Committee had only just been appointed and
retained its counsel. It therefore requested an adjournment so that it could study the transaction,
but the Court denied that request due to the extraordinary need to move quickly to preserve the
Broker-Dealer Business. BCI Ex. 48 (M Ex. 260) (9/17/08 Tr.) 27:10-35:1 (Despins, Peck,
Miller).
Although the September 18 Repurchase Agreement was about to become the centerpiece
of the sale transaction, the Court was told virtually nothing about it. Counsel to LBHI described
the repurchase agreements superficially as a means to continue short term financing so that LBI
could get through the week – not as a centrally important mechanism for structuring the
49
acquisition and establishing a mismatch between the value of acquired assets and assumed
liabilities. BCI Ex. 48 (M Ex. 260) (9/17/08 Tr.) 24:9-17 (Miller) ("And then, Your Honor, in
the interim, LBI has entered into an arrangement with the prospective purchaser where there's a
repo agreement in which they are backing up and allowing these repos to be settled and to be
financed ...")
With respect to cure liability, the $1.5 billion estimate was specifically disclosed to the
Court in connection with the Bid Procedures Motion. First, the Bid Procedures Motion stated
that "[t]he parties estimate that the cure costs associated with such assumptions and assignments
will be approximately $1.5 billion." BCI Ex. 11 (M Ex. 118) ¶ 14. Additionally, in his
presentation to the Court, counsel to LBHI explained that "in connection with the assumption
and assignment of contracts, the cure amounts and other payments in connection with the
contracts are estimated to be a billion five hundred million dollars." BCI Ex. 48 (M Ex. 260)
(9/17/08 Tr.) 24:1-5 (Miller); see also 6/22/10 Tr. 230:8-24 (Cox) (Lehman was making a "good
There was little more disclosed to the court at the Sale Hearing. With respect to the
nature of the sale, the Court's understanding at the time was that the transaction had not changed
and that the subject matter was the same APA with a lower value for the Purchased Assets than
It is true that counsel explained to the Court that there were "many changes" to the
transaction by the time of the Sale Hearing (and that a Clarification Letter documenting such
changes would be forthcoming). Statements from counsel indicated that there was a positive
In terms of the economic changes, they result largely because of the markets,
unfortunately. And from the time that the transaction was actually entered
50
into till [sic] now, the markets dropped and the value of the securities dropped as
well. So, originally, we were selling assets that had a value of seventy —
approximately seventy billion dollars. And today, Your Honor, we're only
selling assets that have a value of 47.4 billion dollars. Barclays is assuming
liabilities, however, of 45.5 billion dollars in connection with those assets. So
that has not changed from the original transaction.
BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 46:21-47:7 (Fife). Counsel to LBHI mentioned the
September 18 Repurchase Agreement only in passing, however, stating that "Barclays basically
stepped into the shoes of the Federal Reserve in connection with the Primary Dealer Credit
Facility as to the 45.5 billion dollars Lehman borrowed last Monday and received the collateral
that Lehman posted in connection therewith." BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 63:18-22
(Miller).
Regarding the estimate for comp, the Court was told that "Barclays will also assume
exposure for the employees that accept offers of employment, which is estimated to have a value
of approximately – an exposure of approximately two billion dollars." BCI Ex. 49 (M Ex. 261)
With respect to cure, the disclosure was that "Barclays is also assuming the cure amounts
relating to contracts and leases that will be assumed pursuant to the asset purchase agreement.
And that has a potential exposure … of 1.5 billion dollars … ." BCI Ex. 49 (M Ex. 261)
IV. Notwithstanding Incomplete and Flawed Disclosure, Cause Does Not Exist for 60(b)
Relief
The evidence is clear and shows beyond all doubt that the Court did not know some very
basic information regarding the transaction that evolved over the course of Lehman Week. The
Court finds, however, that the failure to disclose this information is not cause for relief under
51
Rule 60(b). Based on the record of the trial, the Court concludes that the parties negotiated in
good faith and at arm's length, and that there was no effort to conceal relevant facts.20
After careful deliberation and consideration of an extensive record, the Court concludes
that nothing in that record would have changed the outcome of the Sale Hearing – i.e., the Court
still would have entered an order approving the sale to Barclays even if it had known about the
$5 billion "buffer" producing a gain to Barclays on day one of the sale, the differences in the
comp and cure estimates versus the amount actually paid (or expected to be paid) and/or the
existence and terms of Lehman III. Of particular importance is the lack of any substantial
evidence to support a finding that the Sale Order was procured by fraud, misrepresentation, or
wrongdoing of any kind. The disclosure problems are real, but they are due to the "fog" of
Lehman and an emergency of a magnitude unlike any that has ever occurred in any sale hearing.
Movants suggest but fail to establish that certain former Lehman executives breached
their fiduciary duties because of conflicted loyalties relating to their lucrative employment
agreements with Barclays. LBHI Br. Supp. 60(b) Mot. ¶¶ 14, 18, notes 2-12, 26, 115.
Throughout the trial, Movants continued to insinuate bad faith on the part of these executives,
implying that they were acting in bad faith on behalf of Lehman due to their pending
employment at Barclays. During their questioning of Ian Lowitt and Martin Kelly – the only
such former Lehman executives that Movants called to testify at trial – however, Movants failed
to establish that there was any sort of quid pro quo between any Lehman executive and Barclays
or any other demonstrated breach of duty. See 4/28/10 Tr. 130:10-262:10, 286:13-287:15
20
For example, Archibald Cox, then-Chairman of Barclays America, testified, “Barclays wanted the Court to be in
the position to make the right decision” and at no point did he have “any concern that any of the information being
provided to the Court was in any way inaccurate or incomplete.” 4/30/10 Tr. 206:20-24, 207:18-21 (Cox).
52
(Kelly); 4/29/10 Tr. 10:13-131:20, 165:7-179:23 (Lowitt). Numerous witnesses involved in the
negotiations confirm that the sale was negotiated at arm's length and in good faith.
That is not to say that Mr. Kelly was a credible witness. The opposite is true. He
appeared to be anything but candid and seemed to have been coached to a degree that the Court
might well discount everything that he said. The Court believes that he engaged in a process of
marking down asset values, but finds no basis for concluding that the valuation process was
The testimony of several of Movants' own witnesses – Harvey Miller, Michael Ainslie,
Bryan Marsal and Barry Ridings – supports the conclusion that all parties acted in good faith
during the negotiation process. Miller Dep. Tr. 59:18-60:7 (no former Lehman executive acted
in bad faith); 4/26/10 Tr. 139:5-9 (Ainsle) (no Lehman employee breached his duty of care or
loyalty to Lehman during the negotiations); Marsal Dep. Tr. 76:9-16 (not aware of "any
evidence" that any of the Lehman executives involved in negotiating the sale to Barclays
breached his fiduciary duties to Lehman); Ridings Dep. Tr. 49:13-50:11 ("no reason to believe"
that any former Lehman executive acted in bad faith). Moreover, Lehman's lead negotiator Bart
McDade testified both at the Sale Hearing and at trial that the negotiations were in good faith and
at arm's length. BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 96:6-9 (McDade Proffer); 4/27/10 Tr.
Also supporting the integrity of the negotiations was testimony regarding the extremely
challenging and stressful circumstances under which the negotiations were conducted. Multiple
witnesses to the negotiations testified that the negotiations were rigorous, with vigorous
disagreements between Lehman and Barclays, and that the negotiations were conducted at arm's
length. 8/23/10 Tr. 26:18-27:11, 31:1-4 (Shapiro); 8/27/10 Tr. 25:15-27:24, 40:25-42:6 (Klein);
53
8/31/10 Tr. 14:18-15:5, 16:5-21, 17:12-20, 228:22-229:14 (Lewkow); 9/7/10 Tr. 21:18-22:2
(Leventhal).
Movants highlighted the fact that a number of the senior Lehman executives who were
negotiating the sale to Barclays on behalf of Lehman at the same time were negotiating their own
employment contracts with Barclays. LBHI Br. Supp. 60(b) Mot. ¶1, notes 2-12. However,
Barclays and Lehman disclosed publicly in the Bid Procedures Motion and at the Sale Hearing
that Barclays would retain the top executives from Lehman and pay them bonuses. BCI Ex. 11
(M Ex. 118) ¶ 19; BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 149:11-16 (Ridings). Employee
retention, especially at senior levels, was a necessary feature of the acquisition. Indeed, in order
to keep the business intact and to prevent the loss of key personnel, Barclays needed to include
competitive bonus commitments in its employment offers to top executives. 8/27/10 Tr. 15:11-
17 (Klein); 8/23/10 Tr. 50:16-25 (Shapiro); 8/31/10 Tr. 15:6-23 (Lewkow). The existence of
such incentives is not surprising, and, more importantly, has not been shown to have influenced
Barclays made no effort to keep secret the fact that it expected and planned for the sale
transaction to result in a day-one acquisition gain. BCI Ex. 110 (M Ex. 16); 6/22/10 Tr. 91:2-24
(Varley); 6/21/10 Tr. 141:16-142:5 (Diamond); 5/7/10 Tr. 146:21-147:2 (Ricci). Moreover,
Stephen King, who was head of the Portfolio Mortgage Trading Group at Barclays during
Lehman Week, testified that Lehman's trading assets were exceptionally difficult to value
because so many of them were illiquid. 8/25/10 Tr. 26:18-28:3, 32:24-34:9, 60:23-61:15, 66:24-
68:1 (King). In addition, the identity of Lehman's trading assets was constantly changing – many
of the assets in the repo collateral actually delivered to Barclays were different from those that
54
had been pledged to the New York Fed. 8/25/10 Tr. 15:10-16:6, 23:20-24:17, 55:11-56:6, 153:1-
154:1 (King).
At the Sale Hearing, certain parties in interest objected to the sale transaction on the basis
that Barclays was receiving a "discount value" or "a fire-sale deal," and contended that there was
insufficient evidence as to "whether the proposed purchase price represents a fair value for these
assets." BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 170:8-14, 174:6-8 (Golden), 227:5-14 (Angelich).
Counsel for a group of creditors urged the Court to allow more time for possible competing
offers. BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 167:20-168:3, 171:16-172:2, 174:9-21 (Golden).
BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 244:11-24 (Miller). The Sale Order (which Movants
supported on appeal to the District Court)21 expressly denied and overruled those creditor
objections on the merits with prejudice. BCI Ex. 16 (M Ex. 257) (Sale Order) ¶ 2; see also BCI
The Court finds that the estimates for comp and cure that the parties presented at the Sale
Hearing were just that – good faith estimates, and not guarantees or representations that these
were firm numbers. Barclays did not have the time and information needed for a comprehensive
21
On December 12, 2008, LBHI filed a brief opposing a creditor's appeal of the Sale Order and invoked the terms of
the Clarification Letter as a reason for denying the appeal and affirming the Sale Order “in all respects.” BCI Ex. 33
(M Ex. 405) at 4, 9, 12, 18, 23, 26. The Trustee filed a brief adopting LBHI's brief. M Ex. 552 at 4, n. 1. See also
30-31, supra, for a discussion of the procedural history of the Sale Order.
55
analysis to determine which contracts it would need to assume, and therefore it could not know
how much it would have to pay in cure payments. 4/30/10 Tr. 72:1-12, 74:2-75:14 (Clackson);
4/28/10 Tr. 114:22-115:19 (Miller); 8/23/10 Tr. 44:6-45:15 (Shapiro); 8/31/10 Tr. 92:16-25,
93:9-12, 235:20-236:7 (Lewkow). Indeed, the comp and cure estimates necessarily were
uncertain and contingent. 4/28/10 Tr. 32:8-19 (Miller) (describing the $1.5 billion figure for
cure payments as "contingent"); Miller Dep. Tr. 81:5-14 (total amount that Barclays would end
As explained in the Introduction to this Opinion, the Court did not base its approval of
the sale transaction on any specific number or on any perception of a "wash" or a balanced
transaction. Just as the APA contained no total valuations and no representations or warranties
as to values (and no "true up" to the extent that valuations might change over time), the Court
made no findings of specific valuations, and could not have made any such findings given the
character and description of the assets and the emergency nature of the hearing.
The circumstances presented during the Sale Hearing were truly extraordinary and
unique. The Court approved the Sale because "the consequences of not approving a transaction
could prove to be truly disastrous," and "[t]he harm to the debtor, its estates, the customers,
creditors, generally, the national economy and the global economy could prove to be
incalculable." BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 250:16-21 (Peck). That conclusion is as
B. Barclays Was the Sole Purchaser in a Position to Purchase the Assets as a Going
Concern and Prevent a Liquidation that Would Have Caused a Disintegration of the
Enterprise
The reality is that Barclays was the only purchaser for Lehman's assets. The Court knew
at the Sale Hearing facts that had been widely reported in the media in the months preceding the
56
Filing Date – Lehman had been looking for a strategic buyer or investor for some time with no
success. See, e.g., BCI Ex. 48 (M Ex. 260) (9/17/08 Tr.) 25:10-18 (Miller) ("For months now,
Lehman Brothers has been pursuing strategic alternatives …. [T]he public, the financial markets
knew that these assets were for sale"). During Lehman Week, Lazard also contacted various
entities that had expressed interest in a transaction with Lehman "but not one of them, nor any
other entity, had expressed the desire or ability to step into Barclays' shoes." BCI Ex. 49 (M Ex.
261) (9/19/08 Tr.) 145:5-13 (Ridings Proffer). The Committee refrained from objecting to the
sale due to the "lack of a viable alternative." BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 67:9-14
(Despins). Barclays was the one qualified buyer in a position to promptly complete a going
Importantly, throughout the 34 days of trial, the Movants did not present any evidence
that other potential bidders would have come forward had any of the information not disclosed to
the Court been made public. See generally M Ex. 151; M Ex. 152; M Ex. 153; M Ex. 154; M
Ex. 154B; M Ex. 155B; M Ex. 156B; M Exs. 821-825; 9/20/10 Tr. (Zmijewski); 9/21/10 Tr.
(Zmijewski, Garvey, Schneider); 9/29/10 Tr. (Schwaba); 9/30/10 Tr. (Slattery); 10/04/10 Tr.
(Olvany). What the evidence does demonstrate is that the disintegration of the enterprise and the
liquidation that would have occurred had there had been no sale to Barclays would have resulted
in greater economic harm and losses in the financial markets than actually were experienced in
September 2008 and succeeding months of the financial crisis. See, e.g., BCI Ex. 48 (M Ex. 260)
(9/17/08 Tr.) 64:19-65:4 (Leventhal); BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 60:1-61:13 (Miller),
24, 146:4-14 (Ridings Proffer), 244:11-24 (Miller), 250:13-21 (Peck); BCI Ex. 16 (M Ex. 257)
(Sale Order) ¶ 1; 4/26/2010 Tr. 242:23-243:6 (McDade); 6/25/2010 Tr. 61:4-20 (Despins);
57
5/6/2010 Tr. 118:6-7 (Burian); Ridings Dep. Tr. 12:18-13:4, 35:19-37:15, 65:10-15; 8/23/2010
Tr. 57:19-58:9 (Shapiro); see also 5/4/2010 Tr. 62:16-21 (Seery); 6/22/2010 Tr. 28:22-29:8
(Diamond); 6/22/2010 Tr. 183:10-20 (Varley); 10/6/10 Tr. 84:16-25 (Pfleiderer). As Michael
Ainslie, member of the board of directors of LBHI, testified, in the absence of the sale to
Barclays, LBI's liquidation could result in an "open-ended negative series of claims" on the
Witnesses consistently testified that the Barclays Sale was the best available transaction
for the estate and was far better than an LBI liquidation. 4/26/2010 Tr. 243:3-11 (McDade);
4/28/2010 Tr. 22:20-24 (Miller); 6/25/2010 Tr. 61:4-20 (Despins); 5/6/2010 Tr. 118:6-12
(Burian); Ridings Dep. Tr. 12:18-13:4, 35:19-36:20, 65:4-15; 8/23/2010 Tr. 57:19-58:9
(Shapiro); see also 5/4/2010 Tr. 62:16-21 (Seery); 6/22/2010 Tr. 28:22-25 (Diamond); 6/22/2010
The "most important[]" factor for the court in determining whether to approve a § 363
sale is whether the asset is decreasing in value. In re Lionel, 722 F.2d 1063, 1071 (2d Cir. 1983).
Thus, a sale should be approved when the court is faced with the situation of a so-called "melting
ice cube," a sale that would prevent "further, unnecessary losses," the failure of other potential
buyers to appear despite "well-publicized efforts," and where the only alternative "is an
immediate liquidation that would yield far less for the estate" and creditors. Ind. State Police
Pension Trust v. Chrysler LLC (In re Chrysler LLC)22, 576 F.3d 108, 118-19 (2d Cir. 2009).
22
After the Second Circuit reaffirmed in a full opinion its earlier summary affirmance of the bankruptcy court's
order authorizing a Section 363 sale of the assets of the former Chrysler LLC "for the reasons stated in the opinions
of Bankruptcy Judge Gonzalez," the Indiana State Pension Police Trust filed a petition for certiorari to the United
States Supreme Court. Chrysler, 576 F.3d 108 at 111. During the pendency of the cert petition, the sale of
Chrysler's assets was consummated. On December 14, 2009, the Supreme Court issued a summary order granting
certiorari, vacating the judgment of the Second Circuit, and remanding with instructions to dismiss the appeal as
moot. Ind. State Police Pension Trust v, Chrysler LLC, 130 S. Ct. 1015 (2009) (vacating 576 F.3d 108 (2d Cir.
2009)); see also In re Chrysler LLC, 592 F.3d 370, 370 (2d Cir. 2010) (per curiam) (dismissing the appeal on
remand), In re Motors Liquidation Company, 428 B.R. 43, 50 n.6 (S.D.N.Y. 2010) (describing procedural history).
58
With this legal standard from Lionel in mind, and having been presented with clear and
convincing evidence of the quickly dissipating assets remaining in the estate, the Court approved
One could be a theoretical bankruptcy jurist and say transactions such as this should
always be subject to more time so that parties can better assess the consequences of the
transactions .… This is Friday. This case was filed on Monday. What we're doing is
unheard of but imperative. I am completely satisfied that I am fulfilling my duty as a
United States bankruptcy judge in approving this transaction and in finding that there is
no better or alternative transaction for these assets, that the consequences of not
approving a transaction could prove to be truly disastrous. And those adverse
consequences are meaningful to me as I exercise this discretion. The harm to the debtor,
its estates, the customers, creditors, generally, the national economy and the global
economy could prove to be incalculable.
The evidence at trial supports the statements made during the Sale Hearing. Movants
offered no evidence to contradict the proffered Sale Hearing testimony of Mr. Ridings that "the
sale of LBI must be immediately consummated or there will be little or nothing to sell," that
"these assets have substantially greater value if they are sold as a going concern," and that
"[w]ithout Barclays, Lehman would be forced to sell [discrete] assets for a fraction of the value
that will be realized from this transaction." BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 143:17-19,
Some 2 ½ years after the Sale Hearing and almost two years since the Sale Order was
affirmed on appeal, the Court also is mindful of the well-established public policy of upholding
the finality of sale orders issued by bankruptcy courts to encourage potential acquirers to make
bids on assets in bankruptcy. See, e.g., In re Chung King, Inc., 753 F.2d 547, 549-50 (7th Cir.
1985) (finality policy necessary to encourage bidders); In re Lawrence, 293 F.3d 615, 621 (2d
Cir. 2002) (citations omitted) (finality policy "particularly important" in the context of a
Notwithstanding this procedural history, the references to a “melting ice cube” in the Chrysler opinion provide a
most persuasive rationale for expedited sale hearings.
59
bankruptcy sale order). Because the finality of bankruptcy sales is necessary to encourage
serious bidders, the Court has limited discretion to vacate a sale order. See Chung King, 753
F.2d 547, 549-50 (7th Cir. 1985) (to overturn a confirmed sale, a court must find "a fundamental
defect which would shock the conscience"); accord, In re General Insecticide Co., 403 F.2d 629,
630-31 (2d Cir. 1968) (citations omitted) (strict standard for setting aside sale unless "tinged with
In the Sale Order, the Court specifically held that Barclays was "entitled to all of the
benefits and protections afforded by Bankruptcy Code Section 363(m)." BCI Ex. 16 (M Ex.
257) (Sale Order) ¶ 18. Section 363(m) affords purchasers of a debtor's assets an "assurance of
finality" with respect to "who has rights to estate property." In re Gucci, 126 F.3d 380, 387 (2d
Cir. 1997); see also United States v. Salerno, 932 F.2d 117, 123 (2d Cir. 1991) (conclusion to
uphold terms of sale under Section 363(m) "furthers the policy of finality in bankruptcy sales").
Where, as here, (i) a significant amount of time has passed, (ii) the Sale Order has been affirmed
on appeal, and (iii) the appellate court has rejected challenges to the Sale Order's core provisions,
held that the sale was adequately noticed, and found that the purchaser acted in good faith, the
Court should apply a strict "shocks the conscience" standard. Under this standard, Rule 60(b)
relief is warranted only if the new evidence presented would have changed the outcome of the
Sale Hearing.
Many Courts have denied Rule 60(b) relief without a reason of "such importance that it
probably would have changed the outcome" of the case. Teamsters, 247 F.3d 370, 392 (2d Cir.
2001) (citations omitted) (no relief despite proof of perjury, because result would have been the
same); see also Fitzgerald v. Field, No. 98-7574, U.S. App. LEXIS at *6 (2d Cir. 1999)
(affirming rejection of Rule 60(b) fraud claim where the alleged fraud "could not have affected
60
the outcome"); Matura v. United States, 189 F.R.D. 86, 89 (S.D.N.Y. 1999) ("Rule 60(b)(1)
affords a party relief from a material mistake that changed the outcome of the court's judgment").
Courts regularly have applied the "changed the outcome" test to claims under all
subsections of Rule 60(b). BOUSA, Inc. v. United States (In re Bulk Oil (USA) Inc.), No. 89-B-
13380, 2007 U.S. Dist. LEXIS 27346, at *29-31 (S.D.N.Y. Apr. 11, 2007) (Rule 60(b)(1));
Avedis v. Herman, 192 F.R.D. 477, 478 (S.D.N.Y. 2000) (same); In re Vitta, 409 B.R. 6, 12
(Bankr. E.D.N.Y. 2009) (same); Teamsters, 247 F.3d at 392 (Rule 60(b)(2)); Epps v. Howes, 573
F. Supp. 2d 180, 184 (D. D.C. 2008) (same); In re St. Stephen's 350 E. 116th St., 313 B.R. 161,
174 (Bankr. S.D.N.Y. 2004) (same); Bettis v. Kelly, No. 02 Civ. 104, 2004 U.S. Dist. LEXIS
1543 at *5-6 (S.D.N.Y. Aug. 9, 2004), aff'd, 137 F. App'x 381 (2d Cir. 2005) (Rule 60(b)(3));
Creamer v. Laidlaw Transit, Inc., 76 F. App'x 273, 275 (10th Cir. 2003) (Rule 60(b)(6)). Based
on this standard, and for the reasons stated, the Court finds that Movants are not entitled to relief
V. The Expert Testimony Supports the Conclusion that Barclays Did Not Receive a
Windfall
The decision not to grant relief under Rule 60(b) also is supported by an assessment and
weighing of the expert testimony presented by the parties. The Court heard this testimony over
an eight-day period and admitted into evidence the expert reports of eight witnesses. During this
phase of the trial, Movants sought to prove that Barclays obtained a huge economic benefit due
to the undisclosed discounting of the value of the acquired financial assets and that Barclays
adopted "low-ball" numbers on its Acquisition Balance Sheet that by coincidence exactly
matched the amounts ascribed to these assets by the negotiating teams for Lehman and Barclays.
Movants raised questions about the credibility of the valuation judgments made by Barclays, but
they have not succeeded in proving that these judgments were erroneous. Largely on the
61
strength of the testimony of Professor Paul Pfleiderer, who was the final witness for Barclays and
who testified for two days, Barclays was able to convincingly establish its defense to the
Barclays called Professor Paul Pfleiderer as an expert witness whose testimony tied
together all of the evidence relating to valuation in a most persuasive and comprehensive
manner. He testified regarding a number of issues, notably whether the APA misstated the book
value of the assets being acquired by Barclays, and the value of the repo collateral that was
actually acquired by Barclays in the sale transaction. 10/6/10 Tr. 10:14-25 (Pfleiderer).
Notwithstanding the efforts of the Movants to show that Professor Pfleiderer was being used as a
mouthpiece for witnesses from the Product Control Group of Barclays and from Pricewaterhouse
Coopers ("PWC") who did not appear at trial, the Court accepted Professor Pfleiderer as an
expert in financial economics and valuation and found his testimony to be most helpful. 10/6/10
Professor Pfleiderer has a Ph.D. in economics from Yale University and has been a
professor of finance at Stanford Graduate School of Business for almost thirty years. 10/6/10 Tr.
6:20-25, 7:1-1 (Pfleiderer). Professor Pfleiderer primarily teaches finance courses devoted to
valuation to graduate students in the MBA program. 10/6/10 Tr. 7:4-16 (Pfleiderer). He also
currently teaches a corporate finance course at Stanford Law School. 10/6/10 Tr. 7:6-8
(Pfleiderer). As was true of his testimony as a valuation expert in the Iridium case, the Court
again finds Professor Pfleiderer to be "an especially credible witness" and that Professor
23
Barclays also called Anthony Leitner as an expert in the exchange-traded derivatives industry. Mr. Leitner's
opinions do not relate to the value of the assets stated in the APA or the value of the repo collateral, but rather relate
to the Disputed Assets, and specifically, whether Barclays was entitled to the margin and related property in
connection with its acquisition of Lehman's exchange traded derivatives portfolio.
62
Pfleiderer once again "responded to questions, both on direct examination and during cross
examination, with great candor." Statutory Comm. of Unsecured Creditors v. Motorola, Inc. (In
re Iridium Operating LLC), 373 B.R. 283, 337 (Bankr. S.D.N.Y. 2007).
Based upon his review of Lehman's financial records, Professor Pfleiderer concluded that
the book value of the assets being acquired by Barclays was not understated in the APA by any
significant amount, particularly not by $5 billion, and that the book value according to Lehman's
financial records was approximately $70 billion or less. 10/6/10 Tr. 19:15-20, 49:7-13
(Pfleiderer). Professor Pfleiderer also concluded that the repo collateral was reasonably valued.
In testifying regarding the value of the repo collateral, Professor Pfleiderer explained that
the repo collateral included many financial assets that were illiquid and difficult to value under
normal circumstances, judgment is required in valuing such assets, reasonable people may have
different opinions concerning such valuations and, therefore, there is not one reasonable
valuation for such assets, but a range of reasonable valuations. 10/6/10 Tr. 93:10-94:25, 95:23-
Pfleiderer testified that it was even more difficult to value the repo collateral due to the market
turmoil that existed during September 2008. 10/7/10 Tr. 6:21-7:3 (Pfleiderer).
Professor Pfleiderer indicated that in forming his opinion as to the reasonable valuation
of the repo collateral he considered it important that the Barclays' personnel who conducted the
valuation and made the difficult valuation judgments were active participants in the market with
a feel for the specific market conditions that existed in late September 2008 and that independent
PWC personnel reviewed the reasonableness of these judgments. 10/7/10 Tr. 88:20-89:13,
177:10-178:6 (Pfleiderer). Professor Pfleiderer further testified that he did not find anything to
63
indicate that Barclays attempted to mislead in its valuation, and he was reassured by the
knowledge that PWC had extensively audited Barclays' valuation judgments. 10/7/10 Tr.
14, 193:16-21 (Pfleiderer); see also 10/7/10 Tr. 94:17-96:17 (Pfleiderer). He observed that the
process of an outside audit of the valuation, such as the audit conducted by PWC, generally will
Additionally, Professor Pfleiderer expressed the opinion that in a so-called "fire sale"
liquidation of the assets transferred to Barclays it is "almost inconceivable" that Lehman would
have realized as much consideration as it received for the assets from Barclays and that the
likelihood is that a "fire sale" liquidation would yield "significantly less" for such assets. 10/7/10
Tr. 186:21-187:9 (Pfleiderer). He also testified that Lehman "did better than what it would have
done if it would [have] had a liquidation" and that there was no doubt in his mind that this was
"the case with very, very strong probability." 10/6/10 Tr. 208:19-21 (Pfleiderer). Furthermore,
Professor Pfleiderer stated that Lehman "couldn't have done better; the estate could not have
done better by selling it to another bidder for more, because there wasn't another bidder."
The Court accepts Professor Pfleiderer's conclusions regarding the value of the assets
sold to Barclays and the valuation of the repo collateral. He was persuasive in pointing out that
these hard to value assets were being valued by persons who were intimately familiar with both
the assets and the relevant markets at a time of unusual market disruptions, and that such
valuations were independently audited by a third-party auditor and found to be reasonable. His
cogent and coherent testimony also supports the ultimate conclusion that Barclays did not
64
receive an unfair advantage when it purchased the Broker-Dealer Business and further
The Movants' called a total of six experts to testify with respect to valuation matters, all
of whom are either employed by or affiliated with Navigant Economics (Chicago Partners), an
"economic consulting firm that consults primarily in the litigation or dispute space," or its parent
Navigant Consulting Inc. 9/21/10 Tr. 27:7-8, 12-14 (Garvey); 9/20/10 Tr. 8:15-17 (Zmijewski);
9/21/10 Tr. 147:6-10 (Schneider); M Ex. 154B (Corrected Expert Report of Joseph Schwaba) ¶
1; 9/30/2010 Tr. 19:11-13 (Slattery); 10/4/10 Tr. 10:20-25 (Olvany). The Court accepted
Professor Mark Zmijewski as an expert in accounting, financial analysis and valuation; John
Garvey as an expert in accounting, auditing and financial analysis issues; John Schneider as an
expert in the area of custodial services, particularly with respect to the policies and procedures
the valuation of municipal securities; Mark Slattery as an expert in the valuation of fixed-income
securities; and John Olvany as an expert in the valuation of corporate securities. 9/20/10 Tr.
15:4-12 (Zmijewski); 9/21/10 Tr. 33:1-3, 40:1-20 (Garvey); 9/21/10 Tr. 151:8-13 (Schneider);
9/29/10 Tr. 53:13-16 (Schwaba); 9/30/10 Tr. 21:14-17 (Slattery); 10/4/10 Tr. 14:14-17 (Olvany).
Despite the individual and cumulative expertise of these multiple witnesses called by the
Movants, they were not at all convincing at trial and uniformly appeared to be working in
concert to achieve a desired outcome for the Movants. Movants' experts were not themselves
market participants, and they performed their valuations specifically in connection with this
litigation knowing that the Movants alleged that Barclays had undervalued the assets and were
65
112:9 (Zmijewski); M Ex. 151 (Expert Report of John P. Garvey) ¶6, App. 1; M Ex. 153A (App.
II to John J. Schneider Expert Report, Curriculum Vitae); M Ex. 154A (App. I to Expert Report
of Joseph Schwaba, Curriculum Vitae); 9/29/10 Tr. 75:8-18 (Schwaba); M Ex. 155A (App. I to
Expert Report of Mark E. Slattery, CFA, Curriculum Vitae); 9/30/10 Tr. 59:13-15, 60:3-11
(Slattery); M Ex. 152A (App. I to Expert Report of John J. Olvany, Curriculum Vitae); 10/4/10
Tr. 44:2-5, 83:7-84:22, 87:17-88:8 (Olvany). They were hired to reach a certain conclusion, and
However, counsel for Barclays was able to challenge the methods used and conclusions
Additionally, these experts did not express any views that the Acquisition Balance Sheet, which
was audited by PWC, understated the value of the assets acquired by Barclays in the sale
transaction. Mr. Garvey specifically testified that he was not giving an opinion with respect to
whether Barclays' financials were materially misstated under applicable law, whether the
Acquisition Balance Sheet was unreasonable or incorrect, or whether there were any material
misstatements included in the Acquisition Balance Sheet. 9/21/10 Tr. 46:3-9, 84:17-25, 85:1-
86:4 (Garvey).
A proponent of expert testimony must demonstrate that the proffered testimony is both
reliable and relevant. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993);
24
For example, Barclays' cross-examination of Mr. Slattery revealed that the summary spreadsheet prepared by Mr.
Slattery in connection with his valuation of the Agency Residential Mortgage Backed Securities portfolio
misleadingly demonstrated that in valuing the portfolio Mr. Slattery calculated the “bid” price by reducing the “mid”
price by a “mid-to-bid” liquidity factor adjustment when for certain securities he actually started with a “bid” price
and reverse-engineered, or “grossed up” the “bid” price to create the “mid” price. 9/30/10 Tr. 102:1-107:2, 111:7-
112:3 (Slattery).
66
Amorgianos v. Nat'l R.R. Passenger Corp., 303 F.3d 256, 265 (2d Cir. 2002) (quoting Daubert,
The Daubert factors apply not only to the admissibility of evidence, but also apply to
weight and credibility determinations. See e.g., Elliot v. Commodity Futures Trading Comm'n,
202 F.3d 926, 934-35 (7th Cir. 2000) (affirming district court's decision to ignore unreliable
testimony and finding that a "fact-finder should employ the reliability benchmark in situations …
in which unreliable expert testimony somehow makes it in front of the fact-finder, and assign the
unreliable testimony little if any weight"); Libas, Ltd. v. U.S., 193 F.3d 1361, 1366 (Fed. Cir.
1999) (reliability of expert testimony applies to the weight accorded to that testimony as well as
its admissibility).
To assess whether expert testimony meets the requisite standards the court should
undertake "a rigorous examination of the facts on which the expert relies, the method by which
the expert draws an opinion from those facts, and how the expert applies the facts and methods to
An expert's opinion that is not "based on sufficient facts or data" nor "the product of
reliable principles and methods properly applied," should be rejected. Lippe v. Bairnco Corp.,
288 B.R. 678, 686 (S.D.N.Y. 2003) aff'd 99 F. App'x. 274 (2d Cir. 2004); In re Rezulin Prods.
Liab. Litig., 369 F. Supp.2d 398, 425 (S.D.N.Y. 2005) (rejecting expert testimony where "the
plaintiff's experts have ignored a large amount of information that calls many aspects of the
[expert's theory] into question" and explaining that "any theory that fails to explain information
that otherwise would tend to cast doubt on that theory is inherently suspect")
Expert opinion is unreliable and not based on sufficient facts and data when the expert
"made no attempts to reconcile his view [] with a number of real world events" and "fail[s] to
67
acknowledge and account for these events." Point Prods. A.G. v. Sony Music Entm't, Inc., No.
93 Civ. 4001 (NRB), 2004 U.S. Dist. LEXIS 2676, at *24, *33-35, *43 (S.D.N.Y. Feb. 23,
2004). "[F]ailure to look" at facts, "even for a reality check" means that an expert lacks
sufficient facts and renders his opinion unreliable. Zenith Elecs. Corp. v. WH-TV Broad. Corp.,
D. The Expert Opinions Regarding Valuation Offered by the Movants are Not Persuasive
The Court gives little weight to the testimony of Movants' experts. As discussed above,
the expert witnesses proffered by the Movants, none of whom were market participants in
September 2008, all prepared their valuations for the express purpose of this litigation. 9/20/20
Tr. 108:7-109:3, 110:22-111:7, 111:21-112:9 (Zmijewski); M Ex. 151 (Expert Report of John P.
Garvey) ¶6, App. 1; M Ex. 153A (App. II to John J. Schneider Expert Report, Curriculum
Vitae); M Ex. 154A (App. I to Expert Report of Joseph Schwaba, Curriculum Vitae); 9/29/10 Tr.
75:8-18 (Schwaba); M Ex. 155A (App. I to Expert Report of Mark E. Slattery, CFA, Curriculum
Vitae); 9/30/10 Tr. 59:13-15, 60:3-11 (Slattery); M Ex. 152A (App. I to Expert Report of John J.
Olvany, Curriculum Vitae); 10/4/10 Tr. 44:2-5, 83:7-84:22, 87:17-88:8 (Olvany). They
presented a mosaic of conclusions based upon their valuations of particular classes of assets
as part of a concerted effort of trying to find a windfall. Experts who are valuing assets with
such a litigation bias are not as compelling as those who actually had a "feel for this particular
The Court agrees with Professor Pfleiderer's observation that a "de novo after the fact
68
contemporaneous valuation judgments performed by Barclays were reasonable. 10/6/10 Tr.
89:1-9 (Pfleiderer). This is particularly true in a setting such as this in which the after-the-fact
judgments are seeking to upset the valuation determinations of market participants that were
It was a time of such upheaval that the only thing that was certain was uncertainty. Given
the unparalleled circumstances of the financial markets in the fall of 2008 and heightened
uncertainty regarding the reliability of valuation judgments, the Movants' experts were
challenged with effectively calling into question the judgments made during this period by
Barclays' personnel such as Stephen King, who seems to have been one of the masters of that
valuation universe. The Court finds that Movants' experts failed to prove that the assets were
valued improperly and, based on the examination and cross-examination of the Movants' experts,
the Court is left with the strong impression that their valuations are unreliable.
Theirs was a difficult task. Among other things, they needed to disprove the
reasonableness of the accounting judgments made by Barclays in its Acquisition Balance Sheet,
but they were unable to do so at least in part because they do not assert that Barclays' audited
financial statements are misleading. 9/21/10 Tr. 46:3-9, 84:17-25, 85:1-86:4 (Garvey). Their
decision not to challenge these financial statements is an indication that for the purposes of
public disclosure Barclays' valuation judgments appear to be adequate (or at least not
misleading).
The Court finds that the hindsight valuation performed by Movants' experts (i) does not
take into consideration the judgments of those actively participating in the market in September
2008 and the real world events and unique circumstances of that market, (ii) is not based on
69
sufficient facts and data and (iii) is not sufficiently reliable to support a finding that Barclays
received a windfall. See Point Prods. A.G., 2004 U.S. Dist. LEXIS 2676, at *24, *43.
Barclays claims that the Clarification Letter unconditionally entitles it to the three classes
of Disputed Assets: (i) the 15c3-3 Assets, (ii) the Margin Assets, and (iii) the Clearance Box
Assets. In addressing issues relating to the Clarification Letter, the Court must first determine
whether the conduct of the parties in relying on both the Sale Order and the Clarification Letter,
as was expressly anticipated by the Sale Order, is a reasonable substitute for actual approval by
the Court. To the extent that the Clarification Letter is treated as an enforceable document, the
Court must interpret its plain language to determine which party is entitled to each of the three
classes of Disputed Assets. As explained below, the letter is enforceable and supports recovery
of the Clearance Box Assets but does not support Barclays' claims to an unconditional right to
A. The Court Did Not Approve the Clarification Letter as it Relates to the Disputed Assets
The sale transaction evolved significantly throughout the week immediately preceding
the Sale Hearing. Even during the Sale Hearing, the Court was aware that certain details of the
transaction remained outstanding and would be subject to final documentation before closing25
but understood that the language of the Clarification Letter would not "materially" modify the
terms of the transaction approved by the Sale Order in a way that would adversely impact
Lehman's bankruptcy estates. See BCI Ex. 16 (M Ex. 257) (Sale Order) ¶ 25.26 Absent such a
25
At the Sale Hearing, the lawyers from Weil Gotshal representing LBHI and LBI explained that the transaction
documentation was not yet complete. BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 48:8-10 (Fife).
26
Moreover, the Sale Order authorized the Debtor to enter into final documentation "provided that such additional
documents do not materially change its terms." BCI Ex. 16 (M Ex. 257) (Sale Order) ¶ 3.
70
material change, the Sale Order did not require the parties to present additional documentation to
Rather than contacting the Court to request a hearing concerning the form and content of
the letter agreement that was being revised throughout the weekend,28 the parties elected not to
present the Clarification Letter to the Court for approval and simply filed the Clarification Letter
as an exhibit to the notice of filing of the APA. See Case No. 08-13555, ECF No. 280 (Notice of
Filing of Purchase Agreement, Ex. C). Given the content of the document and the inability to be
sure about the materiality of the changes, this decision in retrospect appears expedient and
probably in error. To the extent that Barclays intended to rely on the language of the
Clarification Letter in asserting rights to the Disputed Assets, it would have been proper (and
certainly better practice) to have sought the Court's explicit "blessing" of such a key transactional
Barclays should have taken all appropriate steps to confirm that all transfers were indisputably
authorized.
Barclays, however, insists that additional approval of the Clarification Letter was not
necessary because it did not materially change the transaction described to the Court at the Sale
Hearing and was, therefore, already "approved" by the Court pursuant to the Sale Order. See,
e.g., 10/21/10 Tr. 133:24-134:10 (Boies) ("[T]he Sale Order then went on to expressly approve
the purchase agreement including the clarification letter …"); 10/21/10 Tr. 139:8-9 (Boies) (the
Clarification Letter "is part of the Purchase Agreement. It is expressly approved in that Sale
27
Nonetheless, at the Sale Hearing, the parties announced their intent to present the final documentation of the
transaction to the Court for approval at a subsequent date. See BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 48:8-10 (Fife)
("And we've clarified in a clarification letter which we're hoping to finalize and actually present to Your Honor
whenever it comes down here").
28
The Court announced that it would be available to discuss the Clarification Letter during the weekend following
the Sale Hearing.
71
Order"). Barclays argues that although the portion of the Clarification Letter relating to the
Disputed Assets was never presented for approval, it can be effectively "deemed" approved
because the transfer of such assets was sufficiently contemplated by the Court at the time of the
Sale Order. See Barclays Post-Trial Mem. ¶ 150 ("Whether the Clarification Letter is viewed as
having been approved in its then-existing oral form or prospectively in its final written form, the
Sale Order expressly approves the Clarification Letter … "). According to Barclays, such assets
were necessarily part of the transaction approved by the Sale Order because that order approved
Barclays' acquisition of LBI's entire "Business." See Barclays Post-Trial Mem. ¶¶¶ 225, 242,
247.29
The Court repeatedly has rejected this circular aspect of Barclays' argument. See
10/21/10 Tr. 136:22-137:12 (Peck) ("Let me be clear about something . . . I never approved the
clarification letter . . . I said that at the opening and I'm saying it again at the closing. . . No
proceedings took place before this Court to approve the clarification letter per se … I'm just
letting you know that that's an aspect of your argument that I reject"). The Court believes that
separate approval of the Clarification Letter should have been requested because provisions of
the document relating to the Disputed Assets materially modified the transaction that was
approved by the Court at the Sale Hearing. Approval of the transaction necessarily was premised
on there being an alignment between the substance of the transaction as understood by the parties
and the elements of the transaction that were disclosed at the Sale Hearing.
Given the many moving parts, the complexity of the acquisition, and the extreme time
pressure, the Court knew that the Sale Order needed to be flexible enough to accommodate
29
The APA broadly defined "Purchased Assets" to include "all of the assets of Seller … used in connection with the
Business (excluding the Excluded Assets) …." BCI Ex. 1 (M Ex. 1) (APA) § 1.1. The "Business," in turn, was
broadly defined as "the U.S. and Canadian investment banking and capital markets businesses of Seller …." BCI
Ex. 1 (M Ex. 1) (APA) § 1.1.
72
changes to the APA. This concept was reflected in the Sale Order, which contemplated final
documentation materially consistent with its terms. But the Court was not aware at the time of
the Sale Hearing that the transaction included the Disputed Assets nor did the Court know
anything about the so-called asset scramble in which Barclays used the threat of walking from
the deal to demand more assets. In fact, as to certain of the Disputed Assets, the Court had the
exact opposite understanding and believed, for example, that all cash, including the Margin
Although the Court approved Barclays' acquisition of LBI's "Business" as a whole, its
authorization was not limitless. The transfer of such significant previously-undisclosed classes
of assets from the LBI estate constitutes a "material adverse" modification of the transaction
compared with previous disclosures to the Court, notwithstanding any ancillary benefits that may
have been received pursuant to other portions of the Clarification Letter. See Barclays Post-Trial
Mem. ¶ 157 ("But even if the Clarification Letter had added additional assets that were not part
of the Purchased Assets in the APA (it did not), the Clarification Letter also made many changes
favorable to the Movants, which must be considered in assessing whether the Clarification Letter
B. Despite the Lack of Formal Court Approval, the Clarification Letter is Nonetheless
Enforceable
Although the provisions of the Clarification Letter relating to the Disputed Assets were
never approved by the Court, the parties relied upon the letter as a whole and treated the letter as
binding and enforceable. The Movants also actively defended the validity of the letter on appeal
30
The cash-free nature of the sale constituted a critically important structural component of the sale approved by the
Court. See BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 253:5-8 (Peck) (“I'm satisfied that given the fact that Barclays is
not taking cash and the only thing that came in to the debtor from Europe was cash that in practical terms we should
be safe”).
73
before the District Court. See BCI Ex. 33 (M Ex. 405); M Ex. 552. The SIPA Trustee opposed
"vacating the Sale Orders because of the havoc such a result would cause in the SIPA proceeding
that he administers, in which many decisions have been made based on the entry of the Sale
Orders, and during which many billions of dollars of property have changed hands." M Ex. 552
at 1.
The conduct of the Movants confirms widespread reliance on the letter. For example, in
a joint submission with Barclays dated September 29, 2008, LBHI described the Clarification
Letter as "clarify[ing] the intention of the Parties with respect to certain provisions of the
Purchase Agreement, amend[ing] the Purchase Agreement in certain respects, and … binding …
the Parties. As more fully described in the Clarifying Letter, the Schedules contain lists of
securities and trading positions transferred under the Purchase Agreement." See BCI Ex. 19 ¶ 7.
In the Settlement Motion, the SIPA Trustee cited and relied upon the Clarification Letter. BCI
Ex. 29 ¶ 16 ("The Clarification Letter provided that the Replacement Transaction was
terminated, and that the securities that had actually been delivered were 'deemed to constitute
part of the Purchased Assets' under the Purchase Agreement"); BCI Ex. 50 (M Ex. 262)
(12/22/08 Tr.) 23:21-24 (Kobak) ("And again, I just want to make it clear that what this
settlement really accomplishes is completing the very transaction contemplated in the purchase
agreement as approved by this Court"). Even as late as August 6, 2009 (and just five weeks
before the filing of the 60(b) Motions), the SIPA Trustee stipulated that the Clarification Letter
was part of the approved APA: "On September 20, 2008, the Court entered the sale order (the
'Sale Order') approving the Asset Purchase Agreement, as modified, clarified, and/or amended by
the First Amendment, and a letter agreement, dated as of September 20, 2008, clarifying and
supplementing the Asset Purchase Agreement." BCI Ex. 377 at 2 (emphasis in original).
74
Similarly, Barclays acted in reliance on the Clarification Letter and treated the letter as
binding when it agreed to close the transaction based on the terms of the Clarification Letter.
Barclays accepted the transfer of thousands of customer accounts, and offered employment,
made bonus payments, and provided severance protection to thousands of former Lehman
employees. See BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 98:10-12, 101:18-102:2 (McDade
Proffer). Barclays assumed contracts and made related cure payments. BCI Ex. 1 (M Ex. 1)
(APA) § 2.5. Operationally, Barclays integrated Lehman's North American business into its
existing operations, and did so on the basis of the APA as modified by the Clarification Letter.
In light of this reliance and the conduct of the parties in treating the Clarification Letter as
a valid expression of their agreement, the Clarification Letter is enforceable notwithstanding the
lack of formal bankruptcy court approval. Although the omission from the Sale Hearing of any
meaningful discussion of the Disputed Assets may have deviated from the core principles of
disclosure underlying Section 363 of the Bankruptcy Code, such a failure does not render the
Clarification Letter unenforceable in this instance because the parties themselves have acted in
reliance upon the Clarification Letter and have treated the document as enforceable. See, e.g.,
Medical Malpractice Ins. Ass'n v. Hirsch (In re Lavigne), 114 F.3d 379, 384 (2d Cir. 1997)
(noting that Section 363 prohibits a debtor from selling estate property out of the ordinary course
of business "until creditors and other interested parties are given notice of the proposed
transaction and the opportunity for a hearing if they object"). By their conduct, including the
decision not to seek further approval of the letter, they have acted as if the Sale Order embraces
75
Accordingly, despite the failure to obtain explicit approval of the Clarification Letter, the
Court will regard the document as having been approved under the broad language of the Sale
Order. Furthermore, even within the context of this litigation, both Barclays and the SIPA
Trustee agree that it is appropriate to enforce the Clarification Letter according to its plain terms
— the parties simply disagree as to the meaning of those plain terms. See SIPA Trustee Post-
Trial Mem. ¶ 416 (The Court "need not reach the question of whether it approved the final
version of the Clarification Letter … [i]t is only if the Court were to agree with Barclays' reading
of the Clarification Letter that it must consider whether … it approved the transfers that Barclays
now seeks"); Barclays Post-Trial Mem. ¶ 223 ("[A]s a matter of straightforward contractual
interpretation, [Barclays] is entitled to each of the Disputed Assets"). In light of this uniform
reliance on the Clarification Letter and conduct of the parties that recognizes the legally binding
nature of its terms, the Court will interpret the Clarification Letter as an enforceable agreement to
the same extent as if it had been separately approved after notice and hearing.
C. Barclays Does Not Have an Unconditional Right to the 15c3-3 Assets and Is Not Entitled
to Margin Assets But Is Entitled to Transfer of the Clearance Box Assets
The relevant agreements are governed by New York law and must be interpreted
according to familiar principles of contractual construction. See Northwestern Mut. Life Ins. Co.
v. Delta Air Lines, Inc. (In re Delta Air Lines, Inc.), 608 F.3d 139, 146 (2d Cir. 2010) (principles
of state law govern the interpretation of contractual provisions in bankruptcy). The Court must
therefore endeavor to ascertain the intent of the parties "from the plain meaning of the language
employed in the agreements." Katel Ltd. Liab. Co. v. AT&T Corp., 607 F.3d 60, 64 (2d Cir.
Where the Court finds the contractual language ambiguous, it may consider extrinsic
evidence of the parties' intent. Roberts v. Consol. Rail Corp., 893 F.2d 21, 24 (2d Cir. 1989)
76
(where a provision is ambiguous, "courts look to the … circumstances surrounding execution of
the ambiguous term to ascertain the parties' intent"). Extrinsic evidence includes "the history and
education of the parties, the nature of the contract, the purposes of the parties and all other
relevant circumstances." In re LaToya Jackson, 434 B.R. 159, 166 (Bankr. S.D.N.Y. 2010)
Close inspection of the plain text of the Clarification Letter, as well as the extrinsic
evidence surrounding its negotiation, execution, and implementation, reveals that there simply
was no agreement to unconditionally transfer the 15c3-3 Assets or to transfer any of the Margin
Assets to Barclays. Moreover, regardless of the language in the Clarification Letter, Lehman
The 15c3-3 Assets consist of (i) $769 million in securities segregated by LBI for its
customers in compliance with SIPA and Rule 15c3-331 and (ii) $507 million in assets posted by
LBI as margin with the Options Clearing Corporation (the "OCC") and listed as a debit item in
LBI's reserve calculation for purposes of Rule 15c3-3.32 Any transfer of these 15c3-3 Assets is
thus governed by the two complementary regulatory regimes of SIPA and Rule 15c3-3. First,
SIPA requires that broker-dealers such as LBI set aside securities and other assets sufficient to
"satisfy net equity claims of customers." 15 U.S.C. § 78fff(a)(1)(B). Second, Rule 15c3-3
31
See 17 C.F.R. § 240.15c3-3 ("Rule 15c3-3").
32
According to Barclays, Rule 15c3-3 does not prohibit the transfer of the $507 million in margin deposits because
these deposits were held outside of LBI's Rule 15c3-3 reserve account. See Letter (the "Barclays Letter") from
Counsel to Barclays to the Court, copying Counsel to Movants and the SEC, dated December 20, 2010, responding
to December 16, 2010 Letter from SEC to the Court (Case No. 08-13555, ECF No. 13517 and Case No. 08-01420,
ECF No. 3987) (The Barclays Letter was not filed on the docket of any proceeding before this Court.) The SEC and
SIPC plainly disagree. See SEC Post-Trial Mem. at 9 ("Transferring [the $507 million] Would Cause a Violation of
the Rule If the Transfer Would Increase the Deficiency in the Reserve Bank Account …"); Case No. 08-01420, ECF
No. 2989 (Statement of SIPC in Support of Trustee's Motion for Relief) at 13-15. The Court agrees with the SEC
and SIPC. To the extent any deficit exists, it would be exacerbated by the transfer of the $507 million and, in so
doing, violate Rule 15c3-3.
77
requires the maintenance of reserves of customer property to ensure full recovery for its
customers in the event of its liquidation. Rule 15c3-3 accomplishes this objective primarily
through two requirements: (i) the broker-dealer's reserve account should contain sufficient funds
"at all times" to allow a firm to promptly return customer property and (ii) such assets may only
be withdrawn if they constitute a surplus over the required minimum balance. 17 C.F.R. §
240.15c3-3(e)(1), (2); 17 C.F.R. § 240.15c3-3(g). To that end, Rule 15c3-3 provides a "Reserve
Formula" to calculate the minimum required balance for a broker-dealer's reserve account. See
The Clarification Letter respects the interplay between this regulatory regime and the
15c3-3 Assets. Specifically, it provides that Barclays shall be entitled to receive the 15c3-3
Assets only if "permitted by applicable law." See BCI Ex. 5 (M Ex. 3) (Clarification Letter) ¶ 8
("In connection therewith, Purchaser shall receive … (ii) to the extent permitted by applicable
law, and as soon as practicable after the Closing, $769 million of securities, as held by or on
behalf of LBI on the date hereof pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934,
as amended, or securities of substantially the same nature and value") (emphasis added). Thus,
this provision is conditional and recognizes that in the event of a deficit in LBI's customer
reserve accounts,33 SIPA and Rule 15c3-3 may prevent the SIPA Trustee from transferring any
Barclays argues that Rule 15c3-3 does not constitute "applicable law" as referred to in the
Clarification Letter because it does not apply to a liquidating broker-dealer such as LBI. See
33
The Trustee and Barclays have stipulated to defer consideration of the factual issue as to whether a deficit or
excess exists with respect to LBI's customer reserve accounts, and no findings are being sought with respect to that
issue. See Case No. 08-13555, ECF No. 13824 and Case No. 08-1420, ECF No. 4020 (Stipulation and Order
Between the Trustee and Barclays Concerning Certain Claims Under Paragraph 8(ii) of the Clarification Letter
Made in the Motion and Adversary Complaint Filed by the Trustee and the Motion to Enforce the Sale Order Filed
by Barclays).
78
Barclays Post-Trial Mem. ¶ 270. But the post-trial brief filed by the SEC contradicts Barclays'
position. See SEC Post-Trial Mem. at 5-8. To carry out the requirements of SIPA, trustees of a
liquidating broker-dealer such as LBI must continue to effect securities transactions, such as
purchasing securities to satisfy customer claims for missing securities and closing out open
broker-dealer must remain registered with the SEC and subject to relevant SEC Rules, including
Rule 15c3-3. 15 U.S.C. § 78o(a)(1). Moreover, adopting Barclays' argument would undermine
the policy objective underlying Rule 15c3-3. That objective is the retention of sufficient funds to
make the customer whole in the event of an insolvency. Indeed, the customer protections
intended by Rule 15c3-3 are perhaps most needed following the failure of a broker-dealer.
In the alternative, Barclays argues that the Clarification Letter, when properly construed,
actually entitles Barclays, not the SIPA Trustee, to the 15c3-3 Assets. It argues that the phrase
"to the extent permitted by applicable law" only limits Barclays' ability to receive those
particular 15c3-3 Assets held in LBI's customer reserve accounts at the time of the execution of
the Clarification Letter. In the event that applicable law prevents such a transfer, according to
Barclays, then the Clarification Letter would still entitle Barclays to receive "securities of
substantially the same nature and value." See BCI Ex. 5 (M Ex. 3) (Clarification Letter) ¶ 8(ii).
The Court declines to interpret this language in the manner proposed by Barclays. To do
unwarranted significance to the phrase "securities of substantially the same nature and value." It
appears that this phrase was used to account for the possibility that, while attempting to obtain
SEC approval, there might be a change in the particular securities held in the accounts. See
Messineo Dep. Tr. 16:7-20; 24:2-26:21 (phrase was added "to take account of the potential for
79
there to be a change in the specific securities held in the customer reserve accounts between
September 22 and the date when it became permissible to withdraw securities from the customer
reserve accounts"). Barclays urges the Court to disregard this interpretation, arguing that Mr.
Messineo's understanding of the plain text was merely his "unexpressed subjective intent," but
more is involved here than drafter's intent. See Barclays Reply ¶ 109 ("[Messineo's] testimony
about his 'understanding' is irrelevant to the Court's interpretation of the … phrase"); Barclays
Post-Trial Mem. ¶ 273 ("The only extrinsic evidence the Trustee relies upon to support his
interpretation of the 'or' clause is legally irrelevant because it is nothing more than unexpressed
subjective intent"). The disputed phrase should be construed to elevate the rights of LBI's
customers in order to avoid an interpretation that would conflict with governing law. See, e.g.,
NLRB v. Local 32B-32J Serv. Employees Int'l Union, 353 F.3d 197, 202 (2d Cir. 2003)
("ambiguously worded contracts should not be interpreted to render them illegal and
unenforceable where the wording lends itself to a logically acceptable construction that renders
them legal and enforceable") (quoting Walsh v. Schlecht, 429 U.S. 401, 408 (1976)); Venizelos,
S.A. v. Chase Manhattan Bank, 425 F.2d 461, 465 (2d Cir. 1970) ("[I]f an agreement is fairly
capable of a construction that will make it valid and enforceable, that construction will be given
it").
unconditional right to $769 million in securities, effectively reading out of the letter the phrase
"to the extent permitted by applicable law." The Court's conditional reading, on the other hand,
reconciles the two phrases and thereby construes the language to give meaning to each term.
See, e.g., Goodheart Clothing Co., Inc., v. Laura Goodman Enters., Inc., 962 F.2d 268, 272-73
(2d Cir. 1992) ("[a] court should interpret a contract in a way that ascribes meaning, if possible,
80
to all of its terms") (quoting U. S. Naval Inst. v. Charter Commc'n, Inc., 875 F.2d 1044, 1049 (2d
Cir. 1989)).
In addition to the text of the Clarification Letter, Barclays argues that counsel for LBI
agreed to transfer the 15c3-3 Assets without conditions and without regard to regulatory
approval, but the evidence of such an agreement is inconclusive at best. Barclays' witnesses
alternatively testified as to a "grunt" or "nod" or "smile" that gave Barclays' counsel a "feeling"
that such an agreement constituted "the economic substance of the negotiation." 8/24/10 Tr.
147:6-13 (Rosen).
Described in this manner, the "unexpressed subjective intent" may in fact have been the
intent of counsel for Barclays. A grunt, nod, or smile is not the same as a meeting of the minds
by means of unambiguous words. The chief Lehman negotiator on this point, lead bankruptcy
counsel Harvey Miller, was clear in stating that he never agreed to an unconditional transfer of
the 15c3-3 Assets to Barclays. See 4/28/10 Tr. 83:22-84:11 (Miller) ("absolutely no
commitment"). Mr. Miller recalled that he participated in a tense discussion with representatives
of Barclays in a hallway at Weil Gotshal's offices and informed Barclays that the 15c3-3 Assets
could not be transferred without SEC consent. 4/28/10 Tr. 83:1-6 (Miller). Similarly, Mr.
McDade, whose authorization would have been necessary to any such agreement, confirmed that
he never agreed to grant Barclays an unconditional right to the 15c3-3 Assets. Mr. McDade
testified that he understood that the transfer of the 15c3-3 Assets was "potentially questionable,
given it needed regulatory authority to be able to be transferred over." 4/26/10 Tr. 198:4-11
(McDade).
Other extrinsic evidence confirms that Barclays knew the transfer of the 15c3-3 Assets
hinged on regulatory approval. For one thing, the SEC communicated this point before LBI's
81
liquidation. See M Ex. 437. As a result, the Barclays negotiating team was on notice that
regulatory approval was needed to obtain the 15c3-3 Assets. See 8/27/10 Tr. 201:2-203:10
(Klein) (testifying that the he reviewed an internal Lehman e-mail indicating that the SEC had
consented to the release of a portion of the reserved assets). Barclays itself confirmed knowing
about this condition in internal conversations with its audit committee. See M Ex. 436 ("the
release of [the 15c3-3] deposit is subject to SEC approval"). Several of Barclays' officers and
representatives echoed this understanding, and recognition of the need for regulatory approval is
reflected in efforts to ascertain whether a deficit existed for purposes of Rule 15c3-3 during the
negotiation of the Clarification Letter. See 6/21/10 Tr. 252:18-25 (Diamond) (recalling that the
agreement regarding the 15c3-3 Assets to be transferred to Barclays included only "the excess
collateral"); 4/30/10 Tr. 227:1-12 (Hughes) (recalling that the 15c3-3 assets had to be "excess
and capable of being delivered"); 4/28/10 Tr. 246:9-15 (Kelly) (recalling that during the sale
negotiations the parties endeavored to "determine if there was excess or a surplus" in the
Customer Reserve Accounts). These efforts would have been unnecessary if, as Barclays now
asserts, it was entitled to $769 million in securities irrespective of Rule 15c3-3 and the existence
Alternatively, Barclays argues that even if the Clarification Letter conditions its receipt of
the 15c3-3 Assets upon "applicable law," Section 8(f) of SIPA34 authorizes the transfer. See
Barclays Reply ¶ 90 ("whether the assets in the Reserve Account are considered LBI property or
customer property, the SIPA Trustee was authorized to transfer that property to Barclays as part
of the overall sale of the Business to Barclays"). This section of SIPA authorizes the satisfaction
34
See 15 U.S.C. § 78fff-2(f) ("In order to facilitate the prompt satisfaction of customer claims and the orderly
liquidation of the debtor, the trustee may, pursuant to terms satisfactory to him and subject to the prior approval of
SIPC, sell or otherwise transfer to another member of SIPC, without consent of any customer, all or any part of the
account of a customer of the debtor").
82
of customer obligations through the transfer of customer accounts to a solvent broker-dealer, but
it is not applicable to the present dispute in which Barclays is seeking to compel the transfer of
customer accounts for its own benefit. See Togut v. RBC Dain Correspondent Servs. (In re S.W.
Bach & Co.), 435 B.R. 866, 887 (Bankr. S.D.N.Y. 2010) (explaining that Section 8(f) "is
designed to facilitate a speedy transfer of accounts to give the customer prompt control over his
assets"). Interpreting Section 8(f) to authorize the transfer of the 15c3-3 Assets to Barclays
would be inconsistent with and would frustrate the section's underlying purpose. Such an
interpretation also would be contrary to the broad principles underlying SIPA, namely its
§ 78fff-2(c) (customer claims receive priority on any property falling within SIPA's definition of
"customer property").
Independent of the Clarification Letter, Barclays asserts that the APA gives Barclays a
right to all assets "used in connection" with the "Business" including the 15c3-3 Assets. See BCI
Ex. 1 (M Ex. 1) (APA) § 1.1 (Definition of "Purchased Assets"). Barclays states that these assets
were "used in connection" with the "Business," namely the "capital markets businesses of Seller
including the fixed income and equities cash trading, brokerage, dealing, trading and advisory
merchant." See Barclays Post-Trial Mem. ¶ 247. Alternatively, Barclays argues that the 15c3-3
Assets are "deposits … associated with the Business." See BCI Ex. 1 (M Ex. 1) (APA) § 1.1.
Thus, according to Barclays, the Clarification Letter merely used explicit language to confirm a
transfer of the 15c3-3 Assets that is already the subject of plain language in the original APA.
The 15c3-3 Assets, however, were never considered part of the "Business" that Barclays
acquired pursuant to the APA. They were not even discussed by the parties to the transaction
83
until the Friday asset scramble. See 4/26/10 Tr. 194:3-195:15 (McDade). Furthermore, the
15c3-3 Assets naturally were unrelated to the "Business" because they are, by their very
these assets could not be transferred without consideration of regulatory constraints. These
assets were set aside to protect customers, were never available unconditionally as extra
consideration for Barclays and were not part of the purchased "Business."
Accordingly, Barclays does not have an unconditional right to the 15c3-3 Assets, and its
motion to recover these assets is denied without prejudice until such time as it may be
determined whether any deficit exists in LBI's customer reserve accounts and whether the
The Margin Assets that are in dispute consist of a total of approximately $4 billion in
cash and cash equivalents held at the OCC, other clearing corporations and exchanges, certain
banks, and certain foreign futures brokers in connection with derivatives trading. This total
includes nearly $2.3 billion in assets posted by LBI at the OCC, primarily in connection with
LBI's options trading business, an additional $1.2 billion at foreign brokers or affiliates and
approximately $400 million at domestic exchanges in connection with LBI's futures trading. The
Margin Assets consist of LBI property used to support trading conducted by LBI on its own
The parties disagree as to whether these Margin Assets were purchased in connection
with the acquisition or were excluded from the sale to Barclays. The APA's definition of
Excluded Assets contains two separate sub-parts that independently encompass the Margin
Assets. First, clause (b) of the definition of "Excluded Assets" excludes "all cash, cash
84
equivalents, bank deposits or similar cash items." BCI Ex. 1 (M Ex. 1) (APA) § 1.1. Second,
clause (n) of the definition of "Excluded Assets" excludes "all assets primarily related to the
IMD Business and derivatives contracts." BCI Ex. 1 (M Ex. 1) (APA) § 1.1.35 These exclusions,
as modified by the Clarification Letter, are at the heart of the dispute concerning the proper
The Court understood at the time of the Sale Hearing that the sale was supposed to
exclude all cash. Counsel made this point with great clarity at the Sale Hearing and stated
plainly that no cash was being transferred to Barclays. Most prominently, Ms. Fife told the
Court "[t]here's no cash that's being transferred to Barclays." BCI Ex. 49 (M Ex. 261) (9/19/08
Tr.) 53:20-25 (Fife). Mr. Miller was similarly unequivocal, informing the Court that "[Lehman
is] not transferring any cash to Barclays." BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 242:11-16
(Miller). Even Barclays' team at the Sale Hearing recognized that cash was excluded from the
deal. See 6/22/10 Tr. 210:11-13 (Cox) (testifying that he understood that "no Lehman cash was
The Court relied upon these representations regarding the exclusion of cash when it
entered the Sale Order. In particular, this explicit exclusion became the rationale for resolving
the concerns raised by LBIE and other objectors at the Sale Hearing relating to the risk that
Barclays might end up taking billions of dollars that allegedly had been transferred to New York
from London a few days prior to the bankruptcy. The representation that Barclays would not be
35
Barclays insists that clause (n) of the definition of "Excluded Assets" does not encompass the Margin Assets
because clause (n) applies only to margin relating to "over-the-counter" derivatives, as opposed to exchange-traded
derivatives. See Barclays Post-Trial Mem. ¶ 248 ("paragraph (n) does not deal with exchange-traded derivatives; to
the contrary, it deals with 'derivative contracts' … which was used solely to describe over-the-counter derivatives,
which were indisputably excluded from the deal") (emphasis in original). But the plain language of clause (n) does
not differentiate between margin associated with either type of derivative. Moreover, the Clarification Letter carries
forward the clause (n) exclusion of assets primarily related to derivatives contracts and further adds a separate
exclusion for over-the-counter derivatives. BCI Ex. 5 (M Ex. 3) (Clarification Letter) ¶ 1(c) ("The following shall
also be Excluded Assets … over-the-counter derivatives").
85
acquiring any Lehman cash, thus, was a key inducement to entry of the Sale Order in the face of
unresolved conflicting claims to cash held by or for the benefit of Lehman. The "no cash to
Barclays" statements are unambiguous and have only one meaning – no cash, and that also
Consequently, the Court rejects Barclays' argument that the Margin Assets necessarily
must have been included in the transaction because of their connection to the "Business"
acquired under the APA. See Barclays Post-Trial Mem. ¶ 242 ("It is undisputed that LBI's ETD
businesses were part of the 'Business' Barclays was acquiring …") (emphasis in original). In
other words, Barclays argues, the Margin Assets must have been Purchased Assets because the
APA provided Barclays with all assets relating to the "Business," and clearing houses and
exchanges require margin to support trading. See 8/30/10 Tr. 9:11-15 (James); 8/24/10 Tr.
100:5-101:9 (Rosen). But the fact that exchanges typically require margin deposits or that
purchasers of other businesses involved in the trading of derivatives typically acquire such
deposits does not bear one way or another on the question of whether the Margin Assets were
included by the parties in this unique transaction.36 The evidence with respect to the acquisition
cash.37
36
For this reason, the Court is not persuaded by the testimony of Barclays' expert Anthony J. Leitner that "no
rational purchaser" would agree to the transaction without the Margin Assets. See BCI Ex. 340 at 49. The likely
conduct and decision making of a hypothetical "rational purchaser" is not persuasive when the parties to this
particular transaction agreed to exclude the Margin Assets.
37
Barclays offers the testimony of Liz James to show that in fact the parties agreed to transfer the Margin Assets to
Barclays. 8/30/10 Tr. 20:7-9 (James) (testifying that there was "an actual discussion in which it was expressly
discussed that margin would be transferred"). But Ms. James admitted to having had no role whatsoever in the
negotiation or documentation of the sale documents that memorialize the agreement of the parties. 8/30/10 Tr.
60:14-22 (James).
86
The Clarification Letter carries forward the APA's exclusion of cash from the transaction:
"Except as otherwise specified in the definition of 'Purchased Assets,' 'Excluded Assets' shall
include any cash, cash equivalents, bank deposits, or similar cash items." BCI Ex. 5 (M Ex. 3)
(Clarification Letter) ¶ 1(c). The Clarification Letter further specified that although LBI's
government securities trading operations were part of the "Business" sold to Barclays, the
government securities themselves were excluded from the sale. BCI Ex. 5 (M Ex. 3)
(Clarification Letter) ¶ 1(b) ("For the avoidance of doubt, the 'Business' includes LBI's
trading operations of LBI (but not any securities of such nature held by seller …")) (emphasis
added).
Notwithstanding this language, Barclays asserts that the Clarification Letter should be
read to capture the Margin Assets as a Purchased Asset.38 Specifically, Barclays relies on the
inclusion of a parenthetical — "(and any property that may be held to secure obligations under
This parenthetical reference simply cannot override the exclusions of the APA or the
representations made during the Sale Hearing. The evidence presented at trial also supports a
conclusion that the parties to the Clarification Letter never agreed as to the language or
significance of this parenthetical, and the words made their way into the document without there
38
Independent of the Clarification Letter, Barclays also claims that the Transfer and Assumption Agreement entered
into between the Trustee and the OCC transferred the Margin Assets to Barclays. However, this ancillary agreement
never was presented to the Court, and so cannot be dispositive as to the parameters of the deal that the Court
approved. In any event, the evidence indicates that the Trustee understood this ancillary agreement merely to
facilitate the transfer of customer assets to Barclays. See 5/4/10 Tr. 184:4-10; 185:2-24 (Kobak).
87
The negotiating history confirms that the parties did not intend this parenthetical
statement to modify the APA's exclusion of all cash, including the Margin Assets, from the sale.
Immediately following the Sale Hearing, an outside lawyer for Barclays with significant
experience in derivatives, Cleary Gottlieb's Edward Rosen, received an e-mail alerting Barclays
to the existence of the Margin Assets. BCI Ex. 242. Shortly thereafter, Barclays proposed new
language for the definition in paragraph 1(d) of "Excluded Assets" that, with clarity and
precision, would have transferred the Margin Assets to Barclays. BCI Ex. 249 ¶ 1(d) (proposed
language carved out of the definition of Excluded Assets any "cash, cash equivalents, bank
deposits, or similar cash items maintained … by or on behalf of any clearing agency or clearing
any other form) the obligations of LBI …"). In response, counsel for LBHI forwarded the
proposed language to the SIPA Trustee on September 21, 2008 and highlighted Barclays'
proposed cash margin carve-out as an unsettled issue subject to ongoing discussion. M Ex. 629.
Early the next morning, counsel to LBHI circulated a revised proposed draft of the Clarification
Letter striking Barclays' proposed language relating to the Margin Assets. See M Ex. 447 ¶¶
1(c), 8.39 As a result, the subsequent draft circulated at 6:03 a.m., approximately three hours
before the execution of the Clarification Letter on September 22, 2008, continued to omit the
stricken language. See M Ex. 448. Without any further discussion or notice to the SIPA Trustee,
Mr. Rosen unilaterally inserted the now-disputed parenthetical phrase into the execution version
The SIPA Trustee never consciously agreed to this new parenthetical. Notably, Mr.
Rosen added the language within the parenthetical to the "Purchased Assets" subsection instead
39
At trial, Barclays claimed that this deletion of the disputed language by counsel for LBHI was in fact
unintentional. See 8/31/10 Tr. 209:12-210:2 (Lewkow). Barclays presented no evidence of any such mistake.
88
of the "Excluded Assets" subsection that had been the earlier focus of attention. Moreover, the
words within the parenthetical do not include "cash" or "margin," in contrast with the previously-
contested language that had touched directly on these subjects.40 The SIPA Trustee never
reviewed the inserted parenthetical provision before closing because the last draft had omitted
the disputed language, and he was not informed of any last-minute revisions. 5/4/10 Tr. 197:4-
22 (Kobak); 5/5/10 Tr. 58:8-17 (Kobak). In fact, for administrative reasons, the SIPA Trustee's
representative executed the signature page for the Clarification Letter hours earlier and was not
In light of this negotiating history, and being mindful of the stated exclusion of Lehman
cash, the Court concludes that the best reading of the disputed language within the parenthetical
is one that interprets the parenthetical phrase as applying only to customer property "held" by
LBI for the benefit of customers, as opposed to margin that LBI may have "posted" in
connection with its own trading positions. Various regulations and rules require customers to
deposit collateral with their broker-dealer or, in the case of futures, their futures commission
merchant, to support trading of futures and options contracts. See, e.g., 17 C.F.R. § 30.7.
commission merchant and held for the benefit of customers, constitutes the "property that may be
held to secure obligations" under exchange-traded derivatives. In fact, LBI held approximately
$2 billion in customer property as margin for futures positions of customers, along with
additional customer property held as margin for the options positions of customers. See BCI Ex.
353 ¶ 15, Ex. 2. The language within the parenthetical would authorize a transfer of these
customer funds to Barclays (for the benefit of those customers) in connection with the transfer of
40
Mr. Rosen testified that he designed the phrase so as to avoid scrutiny that could "embroil" Barclays in continued
negotiations. 8/24/10 Tr. 203:5-20 (Rosen).
89
those customer accounts. This interpretation of the parenthetical is consistent with other
provisions of the Clarification Letter that are intended to ensure the transfer of customer property
to Barclays.41 It also is consistent with the record of the Sale Hearing in which counsel
The Clearance Box Assets are within the third category of Disputed Assets and consist of
approximately $1.9 billion in unencumbered securities held in LBI's "clearance box" accounts at
The Depository Trust & Clearing Corporation (with its clearing agency subsidiaries, "DTCC").42
These assets facilitated securities trading by providing collateral to secure open trading positions.
DTCC looked to this collateral as a means to manage risks associated with its daily clearing
operations. In the event of a default by LBI, DTCC could look to the Clearance Box Assets to
cover any potential liability arising from failed trades. From DTCC's perspective, therefore, any
transfer of the Clearance Box Assets to Barclays threatened to leave it unprotected in the event of
At the time of the Sale Hearing, the parties believed that they had reached an agreement
that allayed DTCC's concerns. Under this agreement, as documented in the First Amendment,
DTCC would consent to the transfer of the Clearance Box Assets and Barclays would provide
DTCC with a $250 million guarantee along with a pledge of billions of dollars in residential
41
For example, paragraph 8(i) of the Clarification Letter entitles Barclays to receive “for the account of the
customer, any and all property of any customer, including any held by or on behalf of LBI to secure the obligations
of any customer ...” BCI Ex. 5 (M Ex. 3) (Clarification Letter) ¶ 8(i). Similarly, paragraph 1(c) of the Clarification
Letter clarifies that “property of any customer, or maintained by or on behalf of LBI to secure the obligations of any
customer” would not be considered an Excluded Asset. BCI Ex. 5 (M Ex. 3) (Clarification Letter) ¶ 1(c).
42
The vast majority of these assets were held in box number 074 at the DTCC, with the rest held in LBI clearance
boxes at Euroclear and a Canadian depository. SIPA Trustee Post-Trial Mem. ¶ 279, n.38.
90
mortgage-backed securities as collateral.43 This understanding fell apart after the Sale Hearing
when the residential mortgage-backed securities could no longer be made available to DTCC as
collateral. Extensive negotiations took place over the closing weekend to deal with this problem.
During the negotiations, DTCC insisted that Barclays fully guarantee any potential
DTCC liability in exchange for the transfer of the Clearance Box Assets. See 5/6/10 Tr. 19:16-
obligations. See 4/26/10 Tr. 233:13-20 (McDade) (Barclays' continued refusal to provide more
than a $250 million guarantee threatened to derail the transaction over the weekend).
agreements – the Clarification Letter and the DTCC Letter – that contain seemingly
contradictory provisions purporting to govern the transfer of the Clearance Box Assets. The
Clarification Letter, on the one hand, provides that the Clearance Box Assets are Purchased
Assets acquired by Barclays. See BCI Ex. 5 (M Ex. 3) (Clarification Letter) ¶ 1(a)(ii)(B)
("Purchased Assets" include all "securities and other assets held in LBI's 'clearance boxes' as of
the time of the Closing … as specified on Schedule B"); Schedule B (identifying assets to be
transferred, and more than 98% of the listed assets were in LBI's DTC clearance boxes). The
DTCC Letter, on the other hand, provides that the Clearance Box Assets are "Excluded Assets"
under the APA and requires Barclays to provide a $250 million cash deposit as a limited
guarantee to cover potential liability from failed trades. See BCI Ex. 6 (M Ex. 449) ¶ 1
("Barclays has indicated, and hereby agrees, that all of the accounts LBI maintained at the
Clearing Agencies Subsidiaries (the "Accounts") constitute "Excluded Assets" within the
43
The Court was advised of this agreement at the Sale Hearing. See BCI Ex. 49 (M Ex. 261) (9/19/08 Tr.) 49:8-17
(Fife). Although the Clearance Box Assets were not specifically mentioned at the Sale Hearing, the evidence
suggests that they were included in the $47.4 billion worth of financial assets described by Ms. Fife at the hearing.
See 5/3/10 Tr. 183:13-185:5 (Seery).
91
meaning of the APA"); BCI Ex. 6 (M Ex. 449) ¶ 2 ("To secure the Guaranty, Barclays shall wire
two agreements by arguing that the DTCC Letter, read properly, does not limit its claim to the
Clearance Box Assets because of the distinction between the "Accounts" and the assets within
those accounts. See Barclays Post-Trial Mem. ¶ 228 ("[T]here is no conflict or inconsistency
between the DTCC Letter and the Clarification Letter … While the DTCC Letter explains that
Barclays was not acquiring the LBI accounts themselves, it did not purport in any way to modify
the Purchase Agreement's grant of the assets within those accounts to Barclays") (emphasis in
original).
strained and implausible. An agreement giving DTCC a right to the "Accounts" as Excluded
Assets, while transferring the contents of those accounts, borders on the nonsensical and would
not have accomplished any purpose. Such a distinction defies logic, as the DTCC would not
benefit from maintaining accounts without the corresponding securities in those accounts. 5/4/10
Tr. 207:24-208:4 (Kobak).45 The interpretation of the DTCC Letter urged by Barclays, while
possible, would lead to a most unlikely reading of the language as part of a struggle to find
consistency. See, e.g., Ronnen v. Ajax Elec. Motor Corp., 88 N.Y. 2d 582, 589, 671 N.E.2d 534
(1996) ("[w]e should not adopt a construction of [a provision] which would frustrate one of the
45
Moreover, such a reading is inconsistent with the other sections of the DTCC Letter that relate to the transfer of
securities, not accounts. See BCI Ex. 6 (M Ex. 449) (DTCC Letter) ¶ 1 ("As part of this closeout process, the Trustee
hereby authorizes DTC to accept and act upon instructions from NSCC to deliver securities …") (emphasis added).
92
However, the alternative interpretation of the DTCC Letter offered by Barclays does
demonstrate an apparent ambiguity in the text of that letter, especially when the language used in
the DTCC Letter is juxtaposed and compared with the obviously inconsistent language of the
Clarification Letter. The two letters, read literally, naturally lead the reader to reach opposite
conclusions. As a result of this ambiguity, the Court may consider extrinsic evidence of the
parties' intent with respect to the provisions of the two agreements relating to the Clearance Box
Extrinsic evidence relating to what was actually intended is not entirely consistent. The
Court has considered the testimony of Isaac Montal, a managing director and deputy general
counsel of the DTCC. His credible testimony would support a finding that Barclays gave up any
claim to the Clearance Box Assets. He recalls three separate telephone calls that occurred on
September 21, 2008 between Barclays and the DTCC and remembers that on the last of these
calls Barclays agreed to exclude the Clearance Box Assets from the transaction. 5/6/10 Trial Tr.
(Montal) 10:22-11:4.
However, Mr. Montal's testimony must be balanced against other evidence indicating that
the parties intended that Barclays would receive the Clearance Box Assets. The negotiating
history reveals that the reference to Schedule B in the Clarification Letter was the result of the
drafters' initial concern that language in the Clarification Letter was too narrow and would have
failed to transfer all of the Clearance Box Assets to Barclays. See Barclays Post-Trial Mem. ¶
237 ("…46 minutes after [circulating a revised draft of the Clarification Letter], Weil Gotshal
circulated another draft Clarification Letter, which … broadened the language conveying the
clearance box assets to Barclays"). The testimony of Barclays' lawyers and negotiators further
93
confirmed this intent to transfer the Clearance Box Assets to Barclays. See 5/3/10 Tr. 56:11-57:2
Additionally, after the closing of the transaction, the parties engaged in conduct
manifesting their intent to transfer the Clearance Box Assets to Barclays. For example, after the
closing on September 22, 2008, Weil Gotshal and Lehman personnel worked with Barclays and
its representatives to finalize the list of Clearance Box Assets in Schedule B. See BCI Ex. 309;
BCI Ex. 742. After closing, the Movants, their representatives and advisors prepared numerous
documents showing that the Purchased Assets acquired by Barclays included the Clearance Box
Written extrinsic evidence from Sheldon Hirshon, DTCC's outside counsel, further
confirms the intent of the parties to transfer the Clearance Box Assets to Barclays. An e-mail
written by Mr. Hirshon recounts his understanding that, during the weekend of negotiations
following the Sale Hearing, DTCC agreed to relinquish the Clearance Box Assets and accept
only the $250 million limited guarantee. See BCI Ex. 376 ("DTCC accepted the revised deal"
after "the resi's were pulled from the deal leaving only the Barclays guarantee"). Notably, Mr.
Hirshon's e-mail does not indicate any expectation that the Clearance Box Assets would be
provided to DTCC to mitigate potential exposure. This understanding of the parties' intent is
consistent with the ultimate commercial reality of the transaction, as DTCC incurred losses in
connection with failed trades arising from the bankruptcy in the amount of approximately $55
million, far less than the full $250 million protection provided by Barclays in its limited
The Court concludes that the Clarification Letter, not the DTCC Letter, best reflects the
agreement between Barclays and the SIPA Trustee with respect to the Clearance Box Assets.
94
The plain text of the Clarification Letter clearly confirms the agreement to transfer the Clearance
Box Assets to Barclays, and the SIPA Trustee is unable to explain away the plain meaning of the
words used in this agreement. See SIPA Trustee Mot. ¶ 81; 5/5/10 Tr. 71:8-10 (Kobak) ("Q:
Now you don't have any disagreement that the clarification letter lists [Clearance Box Assets] as
The SIPA Trustee and Barclays simply agreed in the Clarification Letter that the
Clearance Box Assets belong to Barclays. Importantly, that letter, along with the APA,
constituted the principal documents memorializing the transaction. These documents necessarily
delineated the assets that were being transferred to Barclays as part of that sale. In contrast, the
DTCC Letter had a different principal purpose and was drafted as an implementing transitional
document created to deal with the potential exposure of DTCC arising from the transfer of
securities trading positions. Although the SIPA Trustee was a signatory to the DTCC Letter, the
letter came into existence as a result of DTCC's request to address its potential liability.46
In his effort to reconcile the discrepancies between the two letter agreements in a manner
favorable to his litigation position, the SIPA Trustee must argue that the true agreement between
the parties with respect to the Clearance Box Assets is best manifested not by the central
documents that define the transaction but by an ancillary side-agreement which was prepared to
address concerns of DTCC. But given the relative stature of these two documents and the scope
of each of them, the Court considers the Clarification Letter to be more compelling and
comprehensive in describing with greater precision the universe of assets that the SIPA Trustee
46
It appears that the most meaningful negotiations leading to the finalizing of the DTCC Letter occurred between
Barclays and DTCC. See SIPA Trustee Post-Trial Mem. ¶ 414 ("Barclays was uniquely positioned to ensure that the
two agreements did not conflict … [because n]o other party… including the Trustee and his representatives … was
involved in negotiating and drafting both agreements") (emphasis added); BCI Ex. 479 (e-mail correspondence early
Monday September 22, 2008 in connection with finalizing the DTCC Letter was exchanged between representatives
of Barclays and DTCC, and not with the Trustee or his representatives).
95
agreed to transfer to Barclays pursuant to the transaction. Because these two contemporaneous
documents are in conflict with one another as to the same subject matter, one of them must
The unambiguous text of the Clarification Letter contains more detail and is more
specific with respect to the Clearance Box Assets than the DTCC Letter. Although each
agreement purports to govern the transfer of the Clearance Box Assets, Schedule B to the
Clarification Letter specifically identifies individual Clearance Box Assets, whereas the DTCC
Letter has no similar itemized list of securities. In expressing a preference for the more specific
of the two documents, the Court's conclusion affirms the well-established legal principle that
where two agreements refer to the same subject matter, the more specific agreement controls.
See, e.g., Liberty Surplus Ins. Corp. v. Segal Co., 142 F. App'x. 511, 515 (2d Cir. 2005) (where
there is tension between the provisions of two agreements, "it is axiomatic that particularized
contract language takes precedence …") (quoting John Hancock Mut. Life Ins. Co. v. Carolina
Power & Light Co., 717 F.2d 664, 669 n.8 (2d Cir. 1983)).
Notwithstanding the SIPA Trustee's arguments to the contrary, the Court's elevation of
the Clarification Letter over the DTCC Letter with respect to the Clearance Box Assets neither
"ignores" nor "nullifies" the DTCC Letter. See SIPA Trustee Post-Trial Mem. ¶¶ 410, 413.
Rather, the Court recognizes that the DTCC Letter, even without the provisions regarding the
Clearance Box Assets, provided a significant benefit to DTCC in the form of a $250 million
limited guarantee to protect against potential exposure from failed trades and the grant of
authority needed to close out pending transactions. Moreover, the DTCC Letter functioned in
accordance with the intention of the parties and provided DTCC with the comfort that it needed
to close securities transactions that were pending at the time of closing. See BCI Ex. 6 (M Ex.
96
449) (DTCC Letter) ¶ 1 ("As part of this closeout process, the Trustee hereby authorizes DTC to
accept and act upon instructions from NSCC to deliver securities from the DTC LBI Account
…").
D. The SIPA Trustee is Not Entitled to Relief Under Rule 60(b) With Respect to the Transfer
of the Clearance Box Assets to Barclays
The SIPA Trustee requests conditional relief from the Sale Order47 under Rule 60(b) in
the event that the Court interprets the Clarification Letter to authorize transfer of the Disputed
Assets to Barclays. See SIPA Trustee Post-Trial Mem. ¶ 445 ("To the extent that the Sale Orders
can be read to authorize the transfers that Barclays now seeks, the Court should grant the Trustee
relief under Rule 60(b) based on the non-disclosures to the Trustee"). In light of the conclusion
reached that the Clarification Letter does not unconditionally entitle Barclays to the 15c3-3
Assets or grant rights to the Margin Assets, the Court does not need to rule on those aspects of
the SIPA Trustee's contingent request for relief and will focus on the impact of the ruling that the
As fully set forth in detail in Section III of this Opinion, Federal Rule of Bankruptcy
Procedure 9024 provides that Rule 60(b) shall apply in all cases under the Bankruptcy Code.
Fed. R. Bankr. P. 9024. Rule 60(b), in turn, lists several grounds upon which a court may relieve
a party from final judgment, including mistake, inadvertence, excusable neglect, and newly
discovered evidence.
The SIPA Trustee alleges several independent grounds for relief under Rule 60(b)
applicable to the Clearance Box Assets, including that the transfer of these assets "was never
intended" nor disclosed to the Court or the SIPA Trustee, that the transfer results from "mistake
47
The Trustee requests conditional relief from both the Sale Order and the SIPA Sale Order.
97
or inadvertence," and that the transfer should be disfavored on grounds of "equity and justice."
The SIPA Trustee is not entitled to relief under Rule 60(b) with respect to the Clearance
Box Assets because his request is premised on the notion that the Court, the SIPA Trustee, and
other relevant parties in interest did not know during the Sale Hearing and the closing weekend
that the Clarification Letter contemplated the transfer of the Clearance Box Assets to Barclays.
That proposition is incorrect. The agreement that existed between DTCC, Barclays, and the
SIPA Trustee at the time of the Sale Hearing contemplated the very same kind of transfer at issue
here. Although that particular agreement was never consummated, the subsequent agreement
ultimately memorialized in the Clarification Letter is identical to its predecessor with respect to
the Clearance Box Assets – under each agreement the Clearance Box Assets are transferred to
Barclays. The public disclosure of this agreement distinguishes the SIPA Trustee's request for
relief under Rule 60(b) from the request made by LBHI. Unlike the "newly-discovered" facts
alleged by LBHI as grounds for relief under Rule 60(b), the provisions of the Clarification Letter
transferring the Clearance Box Assets to Barclays were publicly available to all parties, including
The SIPA Trustee's request for Rule 60(b) relief also disregards the very agreement that
he made to transfer the Clearance Box Assets to Barclays. For this reason, the SIPA Trustee's
allegation that "he would not have authorized the signing of the Clarification Letter if he had
known it might be read" to award the Clearance Box Assets to Barclays does not meet the
standards for relief under Rule 60(b). The SIPA Trustee cannot plead ignorance of the facts. He
must have known that the Clarification Letter authorized the transfer of the Clearance Box
98
Assets, because the plain text of the letter that he signed supports transferring the Clearance Box
Assets to Barclays.
Barclays presented a number of defenses seeking to preclude relief under the 60(b)
Motions as a matter of law, but there is no need to consider these arguments because of the
decision to deny 60(b) relief on the merits. Specifically, Barclays has argued that (i) the release
contained in the court-approved December 22, 2008 settlement between the SIPA Trustee,
Barclays, and JPMorgan bars all Movants from bringing any claims relating to the repo
collateral; (ii) Movants were unable to justify their one-year delay in bringing their claims; (iii)
the doctrines of unclean hands and in pari delicto bar Movants' claims; (iv) the Court does not
have jurisdiction to grant Movants' claims under the Mandate Rule; (v) Movants' claims are
barred by the doctrines of equitable mootness, judicial estoppel, equitable estoppel and waiver;
and (vi) the Takings Clause of the Constitution prohibits modification of the APA absent a state
law basis for reformation of the agreement. Barclays Post-Trial Mem. ¶¶ 175-185, 187-195,
198-199, 200-222.
It is unnecessary to address any of these now-moot defenses because of the findings and
conclusions stated in this Opinion. The Court reviewed these various defenses but did not need
to consider them in deciding not to grant relief from the Sale Order. Furthermore, with respect to
any timeliness arguments made by Barclays in connection with the Disputed Assets, timeliness is
not an issue because Barclays brought its own motion to recover the Disputed Assets, and
Barclays could have brought that motion at any time. See Barclays Mot.
For similar reasons, the arguments made by the Committee regarding the timeliness of its
own claims have no bearing on the outcome of this litigation and also are moot. To excuse and
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explain its alleged delay in seeking Rule 60(b) relief, the Committee has written at great length
about the many challenges that it faced in gathering and analyzing information about the sale.
The Committee argues that it was forced by circumstances to "drink from a fire hose" and if it
had known all of the facts surrounding the alleged $5 billion discounting of the financial assets,
it would have opposed the sale to Barclays at the Sale Hearing. Committee Post-Trial Mem. ¶¶
9-10. The Committee further asserts that it did not sit on its rights, but rather consistently
pursued discovery of facts from Barclays and simply waited to bring the Committee Motion until
after obtaining the facts necessary to support such a motion. Committee Post-Trial Mem. ¶¶ 15-
16.
However, the question of what the Committee knew and when it was finally in a position
to fully appreciate the significance of what it knew is irrelevant to the conclusions reached in this
Opinion. What was or was not disclosed to the Committee, whether the Committee had reason
to comprehend the facts that were provided to its advisors and in reports given to the Committee,
and the timing of disclosure to the Committee are of no importance and play no role in the
Court's thinking about the 60(b) issues. As discussed above and for the reasons stated in this
Opinion, the Court finds that even if it had known all of the undisclosed facts at the time of the
Sale Hearing the Court still would have approved the sale to Barclays. Consequently, all issues
relating to timeliness of the Committee Motion simply do not matter. Even accepting as true all
VIII. Conclusion
With such vast sums involved, growing market turmoil, uncertainty as to true asset
values, transactional complexity and precious little time for careful consideration of the critical
events during Lehman Week, perhaps it was inevitable that the urgent, hastily-arranged sale to
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Barclays would be followed by some combination of buyer's or seller's remorse and heavily-
litigated, good-faith disputes regarding contract interpretation. The unique circumstances of that
week produced both a sale of the Broker-Dealer Business at breathtaking speed and the present
For the reasons stated,48 having reflected at length on the circumstances of the Sale
Hearing and the evidence presented at trial, the Court concludes that the lapses in disclosure at
the Sale Hearing did not affect the fairness or alter the outcome of the hearing and were not
Although Movants have shown that the Court did not know everything about the transaction that
it should have known, the Court was not deceived in a manner that should now be permitted to
upset the integrity of the Sale Order. The sale process may have been imperfect, but it was still
adequate under the exceptional circumstances of Lehman Week. Especially due to the
procedural and substantive importance of maintaining the finality of orders approving the sale of
assets under Section 363 of the Bankruptcy Code, based on the evidence justice does not require
With respect to the motion by Barclays to recover the Disputed Assets under provisions
of the Clarification Letter, the Court has determined that the Clarification Letter is a binding and
enforceable agreement even though it was not completed and executed until after entry of the
Sale Order and the parties did not return to the bankruptcy court to obtain specific approval of
the various changes to the transaction that are reflected in the Clarification Letter. Although it
certainly would have been prudent and doubtless better practice to seek further approval from the
Court in the form of a separate order authorizing the parties to enter into the Clarification Letter
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The text of this Opinion constitutes the Court's findings of facts and conclusions of law pursuant to Federal Rule
of Bankruptcy Procedure 7052, made applicable to this proceeding pursuant to Federal Rule of Bankruptcy
Procedure 9014.
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and approving the provisions of that letter, the failure to do so will be overlooked here because
(i) the Sale Order anticipated that this letter was being drafted, (ii) the letter was filed on the
docket on the same day that it was executed, (iii) no party in interest ever sought approval of the
Clarification Letter or to obtain relief from its terms due to the lack of formal approval and (iv)
the parties themselves uniformly have regarded the document as a binding and enforceable
statement of their agreement to amend and clarify the APA and have continued to rely upon all
of its provisions. While not expressly approved in so many words, the Clarification Letter is
the negotiating and drafting of this agreement and the record of the Sale Hearing, the Court
denies Barclays' Motion to compel delivery of assets in relation to the 15c3-3 Assets based on
the conditional language used in the Clarification Letter. Barclays' right, if any, to any of these
assets depends upon a later determination of any deficit in the customer reserve accounts. The
Barclays' Motion also is denied as to the Margin Assets related to exchange traded derivatives
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The parties shall submit within ten days separate proposed forms of order, agreed as to
form and consistent with this Opinion as follows: (i) separate orders denying each of the 60(b)
Motions, (ii) orders applicable to each of the Adversary Proceedings resolving those counts of
the complaints that are impacted by denial of relief under the 60(b) Motions, and (iii) an order
granting in part and denying in part the Barclays' Motion to recover Disputed Assets. The
parties also may arrange a status conference to be held with the Court at a mutually convenient
time to schedule any further proceedings that may be required in light of this Opinion and, if
needed, to resolve any disagreements concerning the form of these proposed orders.
IT IS SO ORDERED.
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